Podcast Episode - Ask KT & Suze Anything: Should I Get a Reverse Mortgage to Pay for my Daughter’s Wedding?

On this edition of Ask KT and Suze Anything, Suze answers some more of your questions about what you can and can’t do with inherited IRAs, debt relief programs, worries about the banking system and more.

Listen to Podcast Episode:

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Podcast Transcript:

Suze: August 1st.

KT: Hello, Leos.

Suze: August 1st 2024. I can't even believe it. August, KT.

KT: Don't remind me that summer's almost over. I love summer. My favorite season.

Suze: Let's just talk. What's your favorite? Let's just talk for a second. What day? What season? What, whatever don't you love?

KT: Probably winter.

Suze: Like we have winter in the Bahamas.

KT: Just winter in general isn't my favorite season.

Suze: But you still love it.

KT: It can be very beautiful. When we lived in New York and we had those first snows, it's very beautiful. But winter in general is not my favorite season.

Suze: I'm just wondering, I got it. But welcome everybody to the Women and Money podcast and everyone smart enough to listen. So this podcast is all inclusive. There isn't one person out there that this doesn't apply to. Ok. Just wanted to say that number one.

Number two, as you can already tell, Miss KT is in the house and this is the Ask KT and Suze Anything edition. Anything, anything, anything. Everything, everything. Whatever you want, whenever you want.

KT: I have a big stack of questions in front of me. So let's get on with it.

Suze: But before we get on with it, if you want, you can write in to asksuzepodcast@gmail.com. Ask your question. You have got to make it short. If you're wondering why I'm not answering some of your emails, it's because KT looks at them. She comes to me and she says, what does this mean? And you're telling me your entire financial life story.

First of all, I can't make personal recommendations to any of you because I don't know enough about you and your situation to be able to do that. So if you really want your question to be answered or have a good chance of being answered on the podcast or from me directly, keep it short and just ask one question. That's it.

And by the way, I just have to say one other thing—if I happen to answer your question directly and I'm giving you the answer online, I'm writing to you—you don't have to write back and say thank you. I know that you're appreciative. But when you write back and say thank you, then everything starts all over again. And then we have hundreds that I have to decipher from where I do want the answer from the person that I wrote.

KT: I kind of like the idea that you get thousands of "thank you, thank you, thank you, thank you, thank you."

Suze: I'm so glad that you do. All right.

KT: Are we ready, Suze Orman? But before we begin with a lot of my questions, I need to go back to Sunday School where Suze talked about inherited IRAs—that was last Sunday. Ok. So the first question is: if the inherited IRA is split between two children, is the RMD also split? For example, if my mother had a $10,000 RMD, do both my brother and I who inherited the IRA each have to take out $10,000 annually or do we each take out $5,000?

It's a good question.

Suze: You know, it's funny you got this one off of the Women and Money Community app, right? If you had looked at the view replies, right? You would have seen that somebody replied to this person with the wrong answer. I know that happens often. That's why I just want to say to everybody:

I love that all of you love the Women and Money Community app where you ask questions, other people answer them, sometimes I answer. You can get it, by the way, by going to Google Apps or Apple Play and download it—Women and Money—free. But obviously, you have to be careful though because not always when somebody answers your question is the answer correct. And in this case, it was not correct. And I did answer this person for everybody to read.

So here's what you need to understand. It does not work that way on any level. When you inherit an IRA—a traditional IRA—from somebody who has started RMDs or died at or after the date they were supposed to start RMDs, you then have to continue to take RMDs. But this is what happens:

When you inherit an IRA, it will be divided into your own inherited IRA account for you, and your brother's own inherited IRA account for him. You do not continue taking the amount of money that your mother was taking out each year. What will happen is now the life expectancy will be based on your life expectancy and your brother's life expectancy.

KT: Can you give us an example of what that would be? For instance, like let’s say you're a lot older than your brother.

Suze: All right. So the key here for all of you to know is that RMDs, when it's an inherited account, are calculated based on the beneficiary's life expectancy, which is determined using the IRS single life expectancy table. So that is true no matter what. Ok? Just so you know.

Let's just assume, rather than what your mother's RMD was, let's assume that you both received $50,000 from an inherited IRA. Mom had $100,000 in her IRA. She dies. You both inherit it. She had already started to take RMDs. So now you each have it in your individual inherited account.

You, let's just say, are 60 years of age. And let's say your brother is 50 years of age. What you would each do is go to the IRS single life expectancy table and what you would find is that your life expectancy because you're 60 is 25.2 years, and your brother's life expectancy is 34.2 years because he's younger.

So your RMD for that year, when you start taking the RMDs, would be $50,000 divided by 25.2, or $1,984. That year is what your required RMD would be. The other RMD, your brother's, would be $50,000 divided by 34.2, which is $1,461.

So, does that make sense? You do not just divide the $10,000 in this example of what your mother really was taking between the two of you. All right? So that’s how it works everybody.

KT: So, Suze, a couple more questions. For an inherited Roth, the optimal strategy is to wait until year 10 to let the money grow for the full 10 years, tax free.

Suze: Absolutely correct. So all of you need to remember is that Roth IRAs never have RMDs—required minimum distributions—which is why I love them so much, everybody. Just so you know, it would make your beneficiary's life far easier if they inherited a Roth versus a traditional. So yes, the longer you can keep money in a Roth, the better off you are.

KT: Ok. For an inherited traditional IRA, it's likely more optimal to spread the withdrawals out over 10 years to avoid pushing yourself into a higher tax bracket.

Suze: Correct. So again, if you are inheriting a traditional IRA where you don't have to take out RMDs, but you have to wipe the account clean in 10 years, then you're better off taking it out little by little over those 10 years. So by the time you get to the 10th year, it's wiped clean. Because otherwise, if you let it accumulate and grow and grow and grow, and in the 10th year you have to take it all out, it may push you into a higher tax bracket.

However, there are always exceptions, KT, to every rule. So it also depends on the size of the traditional IRA that you are inheriting. Because maybe in 10 years it can grow and grow and grow, and in 10 years you will be in a lower tax bracket. You never know your situation.

KT: But if any of you have questions, just go and listen to last Sunday Suze School.

Suze: Better yet, seriously, if you have questions, go to your CPA. Make sure that you are getting the correct advice in your particular situation. That's what I would tell you. The other thing—and I'm gonna say it again and again and again—the true expert, the absolute in this area is Ed Slott. He has a book that you can get. You can go to irahelp.com, subscribe to his newsletter. But if you really want the latest information and everything, Ed Slott really is your go-to person.

KT: Ed does the latest and greatest. So, Suze, from Roberta, I have another RMD question. I just listened to your podcast on RMDs for non-eligible beneficiaries. Just to clarify, my son inherited part of my wife’s traditional IRA. She passed away at age 72 in 2023 before she started withdrawing her RMDs. He still has 10 years from the date of her death to use all of his inherited funds, right?

Suze: So Roberta, you actually have this correct. Because your wife died before it was required that she would take RMDs—at the age of 73, not 72—your son can absolutely have 10 years to wipe the account clean. Just that simple. All right, go on KT.

KT: Ok. Next question is from Susan. Suze, my daughter is getting married and needs money. My savings is dwindling, and I’m thinking about taking money out of the house. If I take money out of my home, is there any help you can give me as to the best way? I am 67 and was thinking about a reverse mortgage, but I don’t know much about it. Any other solutions? Suze, I have a one-word answer: Elope.

Suze: Listen to me, Susan. Just because your daughter has decided to get married and just because she’s doing it in a way where she needs money, that does not mean that you need to jeopardize your future just for one day. That wedding isn’t going to create her future. That wedding is going to create hopefully a life of love for her.

But if you take money and spend money you don’t have on her wedding, and as time goes on she sees that you can’t afford your bills, you’re suffering, you don’t know what to do because of the money that you spent on her wedding—it will end up that she will be so upset that she ever even had that wedding. I can’t even tell you. So this will backfire on both of you big time.

Susan, this is where you need to stand in your truth and say to your daughter: I love you more than life itself. I love that you are getting married. I hope it works out for you forever. But I cannot and I will not be able to help you financially on any level.

When you say your savings is dwindling, when you tell me that you are 67 years of age, that means you're already spending more on your expenses than the income that you have coming in. So you cannot do this. You are not gonna do a reverse mortgage. You're not gonna put money on a credit card. You are going to do what's right versus what's easy and tell your daughter: either she elopes, she has a wedding that they can finance on their own—let them put it on their credit cards, let them ask the spouse’s parents—but you cannot do it.

KT: Hey Suze, one of the best weddings we ever attended was up in the Blue Ridge Mountains for our nephew, David. It was one of our favorite weddings. David and his wife lived in the mountains. They invited all of their local friends.

Suze: And they actually had like a little band of their friends playing, you know, and they made a cake. They had a table filled with cakes that everybody made. Instead of a big wedding cake, everybody made something. Flowers were picked from everybody’s garden. And everyone sat outside, roasted a pig—it was the whole... but the whole wedding maybe cost a few thousand dollars.

Not even. Not even. Yeah, it didn’t cost anything because they didn’t have money. Everybody brought their own wedding gift and that was the true gift. They’re still married to this day with two incredible kids, and still living in the mountains, loving mountain life.

Tell everybody how much we spent on our wedding.

KT: Nothing.

Suze: That’s right. Nothing. So therefore, a wedding does not determine the success of a marriage. All right, KT.

KT: Ok. So next is from Christine. Suze, are the debt relief programs that I see ads for on social media that claim to be able to reduce or nearly wipe out credit card or loan debt—are they legit or are they scams? They seem too good to be true. Is there anything that you recommend that you know is safe and true?

Suze: I would not touch any of those with a 10-foot pole. The way they're able to wipe out your credit card loans, all of those things, is very simple. You have to give them a fee—most of the time upfront, maybe $750 or $1000. They then will instruct you to stop paying those loans. Just don't pay it and put any money you were paying towards those loans or credit cards into a savings account.

Then your credit score is absolutely ruined. Then what happens is they go to the creditors and they try to negotiate. If you owed $5000, they say, all right, we'll give you $2000, we’ll give you whatever. And if the creditor takes it, then you have to give them the money that you've saved towards it. And that's usually how they wipe it out.

The better solution—the better solution—is going to the NFCC, National Foundation of Credit Counselors: nfcc.org, and work out a payment plan with them. It's usually over a five-year period of time. They can normally negotiate the interest rates from your creditors down to 0%. And that’s how I would do it.

Otherwise, believe it or not, you could do it on your own. Just stop paying your bills and ruin your credit score—maybe it's already ruined—and call your creditors and ask them if you can settle with them. But remember, when a creditor relieves any debt—you owe $5000 and they've settled for less—you owe taxes on the difference. Right? So be careful, everybody. All right.

KT: All right. Next question’s from Karen. Karen is nervous about the banks and all the rumors. She said, “In the event of a major crisis in banking, I can’t believe with the U.S. debt that the FDIC would be able to pay us all back. What percentage of savings should I have in a bank or credit union? And what percentage should I keep at home or in a safety deposit box for quick access if something happens to the banking system?” We're getting more and more questions like this.

Suze: Listen, everybody—not every bank is gonna fail at once. That is just a fact. It’s not the entire system. Listen, if the entire system—every bank, every credit union—crashes, we have big time problems. Big time. And that's just not how we're set up anymore.

The banks are required—and credit unions—to have certain amounts of money in reserve. And that's why when you see a credit union like Alliant start to lower their interest rates, or not giving you the absolute top just to sucker you in, it's because they are protecting the credit union. They are making sure they’re not extending and making promises that will put them in jeopardy.

So you have to not always go for the biggest interest rate. If you want to check out Alliant Credit Union—which you all should—go to myalliant.com and look for me, because I can tell you they are conservative. Dennis Devine, the CEO, cares. So I would bet you dollars to donuts... Are donuts valuable, KT? Anyway, it doesn't matter.

KT: Krispy Kreme.

Suze: Do we eat Krispy? But we like Dunkin. I like the little—what are they called—Munchkins? Those little doughnut holes.

KT: Anyway, tell them more about Alliant.

Suze: So basically, I know that their portfolio is structured in such a way that they are not going to go under.

Now, the thing that you have to know is that obviously in any bank or credit union, you have to make sure that you're at least insured by the FDIC or NCUA. Do not have more money in there than what you’re insured for. Ok? Number one.

Next, you're asking what percentage of savings should be in a bank, credit union, blah, blah, blah—whatever percentage makes you feel secure, as long as it's insured under FDIC and NCUA. That is up to you.

However, you're asking what percentage should be kept at home or in a safety deposit box for quick access if something was to happen to a banking system—that amount again is whatever amount makes you feel secure. You just need to know that if you keep, let's just say, $20,000 in your safety deposit box, that’s costing you approximately $800 to $1000 a year in interest that it could be making for you.

So there’s a cost to doing that. So figure out what makes you feel secure and keep that in a place that nothing can happen to. Because again, if you just keep it at home in a box or under your mattress—you’re robbed, somebody takes it, the house burns down, fire, tornado, hurricane, flood—good luck. That money is gone. Maybe your insurance policy covers $500, but that is it.

All right. Next question.

KT: Ok. From Jacqueline: my aunt is leaving her primary residence to me via a living trust. She’s being told by a friend that I’ll have to pay 35 percent taxes to Uncle Sam upon receiving the property. I think I’ll get a step-up in cost basis when I sell it, and there’s not a 35% inheritance tax just because I’m a niece and not a son or daughter. Is that true?

Ok. I never heard that. The aunt wants to know—is it better for her to sell the property before she dies so I don’t have to pay this tax?

Suze: Pop quizzy!

KT: Oh, I don’t know that…

Suze: Pop quizzy. She has an aunt who has a property that she probably bought a long time ago. It's now worth probably a serious sum of money. Some friend told her niece that if her aunt leaves this directly to her niece, her niece is going to have to pay 35 percent tax on the value of that home.

So the question is: should the aunt sell it and just leave the niece cash? Or should she keep the house—hopefully in a trust—and leave it to her niece? It’s in a trust. The part that I’m confused about—is there a difference between being a niece and a son or daughter? Pop quizzy!

KT: Oh, well… I would say maybe the aunt should just sell the property before she dies and leave the money to her niece.

Suze: (makes the wrong answer sound)

KT: Ok. Why did I get that wrong?

Suze: So, for so many reasons. Are you ready? All right. First of all, whoever this friend is, can you just go tell them to kind of take a financial hike? And on the road, as this person’s hiking, to learn the rules before they tell somebody to do something—that would be the biggest mistake in your life.

Second, KT, there is no difference who you leave something to: a niece, a friend, a spouse—it does not matter. The only difference with a spouse is that there is no estate tax limit. Currently, the estate tax limit for this aunt to leave something to her niece is about $12 million, $800,000. Anything under that is absolutely estate tax free.

Number one. Number two, even if her aunt doesn’t die for a little bit, and in 2026 we go back to the old estate tax limits, it’s still around $5 million. Ok?

In terms of income tax: if her aunt dies and leaves this to her niece via the trust—so there’s no probate—even if she didn’t have a trust and it was in a will and left it to her niece, guess what? The niece gets a step-up in cost basis.

KT: That’s what she said.

Suze: Just like she thought. If her aunt had a house that she bought for $100,000, and it's now worth a million… a million. All right? The niece gets it, turns around and sells it—no income tax whatsoever.

If the niece keeps it, lives in it, and now all of a sudden a year later it’s worth $1.1 million and sells it, now she pays taxes on just the $100,000 as capital. Remember that. Ok?

Now, if the aunt sells it now like you wanted her to, so that she could give the cash to her niece—number one, where is her aunt going to live? And number two, her aunt is going to have to pay capital gains tax on that, leaving less money for her to leave to her niece.

So therefore, if she gifted the house right now to her niece—right now—she’d also be gifting her tax basis. So if it was $100,000, that’s what the cost basis would be for the niece. So the only way this should go down is: aunt should keep the house, keep it in a trust, live in it till she dies. Then the niece inherits it and everything goes smoothly. Ok?

I mean, ok. You sound like you’re a little wounded pumpy there.

KT: No, I was just confused about the son, the daughter, the niece.

Suze: No difference, KT. Spouse is a little bit different but not much.

The only difference with a spouse is I can leave you, KT, any amount of money. I could leave you $100 million.

KT: You could leave me $100 million. You could leave me a billion.

Suze: Any amount of money. A spouse to a spouse on death never pays estate taxes. Anybody else pays estate taxes—unless it’s a charity.

KT: Ok. This is from a strong single mom. We love strong single moms. Hi, Suze and KT. I'm a single mom living in the Bay Area. My ex-husband and I divorced nine years ago. At the time of our divorce, it was my choice to leave that abusive marriage without seeking spousal or child support. I chose to give myself a fresh start, a life that I own myself, and I wasn't afraid to start over.

Everybody who's in that situation—listen to what she's saying. Listen, listen. So this is interesting. The ex-husband is gone, he fled the country, and he is out of their life. My ex-husband’s mom and I have always had a good relationship with my son. We still see her for dinner occasionally now and then, and she also lives in the Bay Area. She owns a few residential properties that she rents. She and I have started to talk about financial support for me and my son. So the grandma wants to participate and take care of her grandson.

She said, I'm currently living in a condo that I own, but I want to move to a single-family home. She's offering that I rent out my condo and then move into one of her properties as her tenant. While this will allow us to live in a single-family home with more space, I do not feel comfortable living as her tenant. I want to live in my own home where I own it. So this is where it gets a little bit sticky.

The grandma says she does not want to sell or transfer the ownership to me due to taxes. Is there any way for her to transfer the ownership to me or to my trust without huge taxes? If she sells a house that she inherited in 2009 that was purchased in the 1990s, would there be huge capital gains tax?

Suze: Yes, there would. So, what can she do?

Here’s what you really need to understand—again, very similar to the quizzy that I just gave you. You don’t want anybody, if they don’t have to, to sell a home that either they’re renting out or whatever it may be where there is a huge gain. And if they inherited it in 2009, their cost basis is whatever the house was worth in 2009.

And may I remind all of you—back in 2008, the housing market crashed. So if she inherited a home in 2009, before home prices started to skyrocket again—remember, that was 15 years ago—the cost basis on her home is seriously low and probably now very high. Plus, it’s giving her rental income. So rental income in the Bay Area, which is San Francisco, is incredibly high.

You don’t want her to sell it just because you want to live in a house that you own. What you should probably do is have a heart-to-heart talk with her, move in to her home, rent it from her, and ask her—if it’s possible, because maybe she doesn’t have anybody else to leave anything to—that as she gets older, you will take care of her in the best way you possibly can.

Can you ask her that upon her death, in her trust, can she leave it to you? And then you obviously will leave it to your son. You can even set it up where that is mandatory in her trust so that she feels good about it. If she were willing to do that, girlfriend, that would be the best of all worlds.

What you can do is, with your condo—just so that you still own something—just rent it out or put it in the Airbnb section and make money with it that way, as well as probably it appreciating somewhat in the future. You can do that as well so you also feel like you own something.

Long answer to your question, but KT, the reason that I went long with that is that there seems to be a lot of confusion about inheriting properties and how does it work tax-wise, and when should you inherit it via a death or giving it to somebody—and there’s a lot of confusion about that. That’s why I spent so much time on it.

We already had your quizzy, girlfriend.

KT: I know.

Suze: Are you happy?

KT: Yes.

Suze: Because you got it wrong?

KT: Well, let’s put it this way—I would be elated if I got it right.

Suze: All right. Next time you will.

All right, everybody. So that’s the end of today’s podcast. I’m not sure exactly what I’m gonna be doing Sunday with Suze School. Just heads up—we have a storm coming our way. It’s coming our way. See where it goes.

So, we’ll see what happens on Sunday’s podcast, if I can broadcast or not. But until then, there’s only one thing that we want you to remember, and that is this:

People first. Then money. Then things. And if you do that and stay healthy, you will be what, KT?

KT: Unstoppable.