Podcast Episode - Ask KT & Suze Anything: Should I Use a HELOC to Pay Off My Debt?

On this edition of Ask KT and Suze Anything, Suze answers questions about buying property, paying for college, how to respect an inheritance and so much more!

Listen to Podcast Episode:

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Podcast Transcript:

Suze: June 6th, 2024. I think I feel so old this morning. Anyway...

KT: Wait, everyone—it’s the day after Suze’s birthday and it’s also your cousin Ethan’s birthday today.

Suze: Happy birthday, Ethan.

KT: Ethan, I hope you have as much fun as we did yesterday. But we’re not going to tell you what we did.

Suze: We had a secret rendezvous. We went somewhere.

KT: It was great.

Suze: But we're not telling anybody where we went or what we did. That's between me and KT. So anyway...

KT: Happy birthday to all the Geminis out there. She loves her Geminis.

Suze: I love everybody. Welcome everybody to the Women and Money podcast and everyone smart enough to listen. This is what, KT?

KT: Ask KT and Suze Anything.

Suze: And how do they do that, KT?

KT: You go to asksuzepodcast@gmail.com. That’s Suze—and send in your question and keep it nice and short because guess who picks it? I do. And if it says KT, KT, KT, pick me, pick me, pick me—and I am Andrea—I’m picking!

Suze: But you have to be more creative than that now that she told you that. So anyway, that’s what you do. And I just want to say—hopefully yesterday on my birthday, you were able to enter that quiz, answer all the questions on myalliant.com. Now shortly the winner will be notified.

KT: Ok, here we go. So Andrea, I am picking you. Dear Suze and KT, thank you for all your excellent guidance over the years, including the incredible Amazon Freevee episodes. You changed so many lives for the better. So for those of you that don't know about the Freevee episodes, this is all Suze Orman shows—maybe 600 of them. Unbelievable and so much fun to watch, and guess what? The advice in many cases is as good as gold. So look them up. It's free.

Now here's the question: Suze, I'm looking for your thoughts on what I should do with what is for me a ton of money. I sold some land last week and received $77,000. Good for you. I have one year before I need the money to purchase a property for my outdoor classroom so I can continue teaching. I have first right of refusal on an $87,000 property which will go on the market next spring. My goal is to use the $77,000 to earn an additional $10,000 over the coming 12 months so I can pay cash for the new property.

Suze, I'm visualizing hard on this goal but would love your input regarding the options. What do you recommend?

Suze: Well Andrea, I can tell you KT is already looking at me like, "Make it work for her, Suze, make it work for her." So the first thing is, it's really impossible to take $77,000 and in one year earn an additional $10,000—that's a whole lot of money. Even if it were to earn 10% a year, that's only $7,700, and that would require investing in the stock market and hoping it performs well. But you can't invest money in the stock market that you need in one year. Honestly, you can't invest money in the stock market that you need within five years.

This is money that has to be put into a money market account or a one-year certificate of deposit. If you were to invest that $77,000 at 4% or even a little more, and after taxes, you'd end up with about $3,000. So you’d be at $80,000—but that’s still $7,000 short of your goal.

If you visualize really hard on that goal, you need to look at your other money. You have a fully funded Roth IRA with $43,000. So it's very probable that $7,000 of that fully funded Roth was from your original contributions. I would take it from there. You also have an investment account with $1,700. Depending on the tax situation there, you could take it from that. You have a $5,000 CD with Alliant Credit Union—and probably it was a one-year certificate of deposit. So by the time you literally have to buy this property, you could take it from there.

The key here is that your goal really can become a reality. And you have choices as to where you want to take that money from. So that’s all you need to know. Write us in a year and let us know what you did.

KT: Send us a picture of the classroom too. Send us a photo of the outdoor classroom!

Suze: There you go, girlfriend. No problem.

KT: Suze, from Ed: If I convert traditional 403(b) funds to Roth 403(b)s, does the pro-rata rule apply?

Suze: No. And for those of you who don’t know what the pro-rata rule is, you better look it up. All right, go on.

KT: Next question is from Valentina. I love that name. Hi Suze and KT. I hope you're well.

Suze: Are her hopes true?

KT: Yeah, we’re not well—we’re great!

Suze: We’re great.

KT: I’ve been trying to learn about 529s. I recently listened to a Suze School episode on it and it was very informative. Once I mentioned it to my husband, he said our neighbor—get this—is selling life insurance, and we should use that instead for college.

Suze: Oh, you know what? I answered this. I was so upset.

KT: Wait, no one knows why you’re upset yet. Let me finish. So Valentina said: Suze, I’m so confused. I thought you had to die to get life insurance. If you get a chance, could you please compare the two?

Suze: Listen, there’s no comparison. Listen up everyone. Valentina, as you know, I go through all the emails. And if I see one where you are about to make a serious mistake—now I don’t see everyone, there are too many—but if I see that you’re about to make a serious mistake, oh, I answer you right away.

And as you know, Valentina, I said this to you—but now I’ll let everybody hear what I told you: First of all, whenever you have a neighbor, a relative, a friend—and they want to sell you something—you are not to do it. Because number one, if it doesn’t work out, there goes your friendship. There goes your relationship. Period. All right?

But the mere fact that your neighbor wants to sell you a life insurance policy that you should use instead of a 529 plan—that has to be the worst advice I’ve ever heard in my life. And as I told Valentina: you are to run, not walk. Your husband needs to stay out of this, because obviously he doesn’t even know enough to see that that was horrible advice. He should have said on the spot, “No way.”

Your neighbor, in my opinion, wants to sell you that life insurance policy not to put your kids through college, Valentina—but to put his kids through college, or put more money in his retirement account. Because those are big ticket items for a life insurance agent. The only reason they do that is because you put money into a whole life, variable, or universal life policy. The commission is approximately 70 to 90% of the first year’s premium.

When you go to take money out, you take it out as a loan against the policy, and therefore it’s tax-free. But if the policy expires or you surrender it, that loan has to be paid back. If there isn’t enough in the policy, you could lose everything. It’s the worst idea possible. Just don’t do it. And anyone who has anyone approach them with that suggestion—

KT: Do you want to give her some guidance and tell her about your favorite 529 site?

Suze: Yeah—just go to savingforcollege.com. That’s where you should go. And that’s what I already told her. Just go there and learn about 529 plans, savings plans, prepaid plans—if you can afford to save for your kid’s college education. And you need to recognize whether you can or can’t. If you can, do it through a 529 plan.

KT: Next question is from Deva. Dear Suze and KT, I have a question about converting SEP IRAs into a Roth. My financial advisor guy—ready for this—who is one of those that I met at a dinner presentation you speak of (LOL).

Suze: I hope you had a nice dinner. I hope he didn’t serve you a plate of financial junk. But anyway, go on...

KT: He suggested that I convert my SEP of $60,000 into a Roth over two years—$30,000 each year. My question is about the amount. Am I allowed to convert that much, or does it need to conform to the yearly max of what you put into a Roth?

Suze: No, you do not have to conform. You can still max out your Roth IRA contribution separately and still convert $3 million if you wanted to. However, maybe your financial advisor is a certified financial planner—is he? If he is, then also he might have had a little bit of training and understanding about the tax ramifications to you, and could possibly figure out if this is a smart thing to do based on your income as well.

I would never be converting that much money into a Roth without first consulting a CPA or tax professional. They should figure it out according to your income taxes. That’s number one. The real question isn’t just should you, or can you, but what are you going to invest in once you convert it?

Where is that money currently invested? Should you be converting it in-kind—meaning, as is—into the Roth? I would want to know a whole lot of things before I converted anything, especially from someone you met at a dinner.

KT: This is from Eileen. She says, "I was one of your lucky 'How Am I Doing?' guests way back when."

Suze: What’s her name again?

KT: Eileen.

Suze: Hi Eileen! Did I help her?

KT: Let me finish. You gave me amazing advice to fix my only issue that kept me from a top FICO score. Now, I have another question. I own a single-family home in L.A. with my husband and brother. The house is held in the names of my brother's trust and my husband and my joint trust. We've rented out the house for 14 years, but now we wish to sell it. What should we do to maximize our capital gains?

Suze: Eileen, sweetheart, first, a lot of times with rental properties, your CPA may have told you to depreciate it over time for tax benefits. If you did that, and now you’re going to sell, you’re going to have to recapture all of those deductions and pay more in taxes.

Unless you’re doing a 1031 exchange—which means rolling the proceeds into another rental property to defer capital gains—you’ll owe the taxes. But I don’t think you want to do that. So, make sure you gather every single receipt you have spent on that property. What did you do to improve it? New roof? Appliances? Landscaping?

Whatever it is, it could increase your cost basis and reduce your capital gains. Also, if you are the one paying the real estate agent’s commission, that too reduces the net proceeds. After all expenses, you pay capital gains on what remains. And yes, you’ll split the remaining gains according to the ownership in the trusts.

KT: Next question is from Sarah. KT, I love you on the podcast. I'm right there with you getting the quizzy wrong.

Suze: That’s why she picked that one!

KT: Come on, Sarah! We can do better. You and I will get the next one right. So here is my question. My parents have told us they have put everything into a trust which upon their death will be split evenly between me and my two siblings. But they won’t say more than that. So I don’t know what they have in the trust other than the house. A few weeks ago, my father told me it would be a sizable amount. When I said we would plan to give everything to charity, he made me promise that what he left me would go to my brother and his kids before I die. I do not agree. If the total is broken in thirds, I shouldn’t have to do what he's asking. What would you tell him?

Suze: I would tell him he's right. And Sarah, here’s why: your father has the right to do whatever he wants with his money. He has generously chosen to leave it to his children. He clearly wants what he leaves to you to go to his grandchildren after you’re gone—not to charity. And frankly, he can make that happen legally if he wants to. He can place it in an irrevocable trust, make it mandatory that it goes to them, or create stipulations you must follow.

So as much as you want to leave it to charity, you have to respect the wishes of your father. It’s his money. Respect him. Respect his wishes. And also, you may think you're doing really well right now. But you never know what life might bring. Maybe you’ll need that money. Or maybe your own family will.

Put it in a trust for yourself with the provision that it goes to your brother’s kids upon your death. That way, you fulfill your father’s wishes and still maintain flexibility. Just be careful—if he thinks you won’t do as he asks, he may decide not to leave you anything at all. Don’t risk that. It’s his wish, and he’s not asking for something unreasonable

KT: Ok, next is from Josefina. Hi KT and Suze. I'm a long-time follower of your podcast and books. I've gotten into debt for multiple reasons, but mostly after COVID and trying to keep my house, which at this point is my biggest asset. This is a little sad, Suze. She’s 59 years old and has about $20,000 left in retirement savings.

She says she has a few CDs and a Roth IRA at Alliant. Her total debt is $40,000. She's been thinking about getting a HELOC to pay off her higher interest credit card debt. Her house is valued in the low 400s—let’s say $420,000—and her loan is about $155,000.

She says, "I'm a single parent with a 15-year-old son. I've been trying to stay in our home until he finishes high school. At this rate, I'm not sure how I'm going to get out of this. Please help." She just started a new job with benefits and is trying really hard to contribute to her 401(k) with the match and everything at work. She's doing her best to keep a roof over their heads.

Suze: Josefina, first of all, there’s a rule of thumb: never transfer unsecured debt—like credit card debt—into secured debt like a home equity line of credit (HELOC). If you default on your credit card debt, they can’t take your house. But if you take out a HELOC and can’t pay, they absolutely can. That puts your home at risk—and that’s not something you can afford to gamble with right now.

You do have a few choices. One is to go to nfcc.org—that’s the National Foundation for Credit Counseling. It’s a nonprofit organization. You can sign up with them and for about $10 a month, they will work with your creditors and negotiate a 0% interest rate on your credit card debt. You’ll pay them, and they’ll distribute payments to your creditors. It’s safe, it's reputable, and it won’t hurt your credit score. They’ll likely put you on a five-year repayment plan.

Option two—and maybe you’ll like this, maybe not—is to consider selling your home. You have about $265,000 in equity. If your goal is to stay in the house until your son finishes high school, that’s two more years. But you need to consider if it makes sense to stay. You might sell now, get out of debt, and then either rent or buy something more affordable. Maybe a smaller home or a manufactured home—just something that takes the pressure off.

You’ve started a new job, so you have income. If you can work with NFCC, get on a payment plan, and still afford your home and contribute to your future—great. But I would not take out a HELOC. That’s just putting your future—and your son’s—at risk.

KT: So no HELOC.

Suze: No HELOC. Heck no. Ok?

KT: I have one more question for you. This is from Michelle. It’s interesting and I don’t know if we know the answer—but it’s something people worry about. Future taxes on Roth accounts. She says:

"Hello Suze and KT. Thank you for all your great advice, especially on Roth accounts. We will be forever grateful. My husband and I have been contributing to Roth IRAs since we learned about them through you, way back when. Because of this, we will be able to control our withdrawals and taxes. We’ve saved more in Roth accounts than traditional. However, a friend—"

Suze: Of course!

KT: "—who has worked with the IRS for a long time says we need to be careful, since the government could change tax rules in the future to eventually get at our Roth earnings. Is this true? Could the government change the rules and tax our Roths?"

Suze: Michelle, here’s what I want to say: anything is possible. There’s no way for me to know what Congress might do in the future. But let’s talk about the reality. What is the downside here?

So what’s the alternative? You put money in a traditional IRA or 401(k) and pay taxes on it later? You’ll owe taxes no matter what. If, in a worst-case scenario, the government decides to tax Roth earnings someday, at least your contributions came in tax-free and you probably got a better deal than if you had deferred taxes on 100% of the account in a traditional account.

But let me be clear. I have a really hard time believing they will reverse Roth tax benefits. In fact, in the SECURE Act 2.0, which passed in December 2022, they expanded Roth options. They introduced Roth SEPs, Roth SIMPLEs, and allowed employer contributions into Roth 401(k)s. They even removed RMDs from Roth 401(k)s. If anything, they’re making Roths more attractive—not less.

And if they ever did make changes, I believe those of us already invested would likely be grandfathered in. I can’t see them applying new taxes retroactively—that would trigger a revolt. So stop worrying. Do not stop contributing to Roth accounts. I hope your friend enjoys their job at the IRS, but no, I do not think this is something you need to worry

KT: I’m putting my hand over my heart, which is my signal for Suze to come from love. Be kind, be calm.

Suze: It’s very difficult for me to be calm about things like that. It is. It’s difficult when I know someone is getting advice that could financially hurt them. That goes to the very core of why I’ve spent 40 years doing this. I take it to heart. Do you think I spend the hours I do every day answering emails just for fun?

I’m not making money off this. I’m not managing investments. I’m doing it so people can sleep at night. So they can feel okay—and be okay. I want them to be more than okay. So yes, I take it personally.

Suze: All right, ready for your quizzy, Missy?

KT: I hope it’s a nice one.

Suze: This one’s from Marisol. Do all of you just enjoy hearing KT and I banter? I know Robert does. Anyway—dear Suze, and you all know by now what a quizzy is. Can you answer this yourself, everybody?

Dear Suze, my question is: if I keep rolling over money from a traditional IRA to a Roth, will that income be considered ordinary income—even though it's going into a Roth IRA? I am planning to do this for 10 years. After that, will it be reevaluated for Medicare Part D?

KT: I know the answer already.

Suze: Let everybody think about it for a second. To be clear, this person is converting money from a traditional IRA to a Roth, and wants to know: will that be considered ordinary income? And will it affect Medicare premiums—specifically Part D?

KT: The answer is yes, it’s going to be considered income.

Suze: What kind of income?

KT: Ordinary income.

Suze: Ding, ding, ding! Yes, it's taxable at whatever your income tax rate is. And yes, it will be evaluated for Medicare premium calculations. Specifically, it affects your Medicare Part B and D premiums based on your income. Your Medicare premium gets reassessed every year based on your tax return from two years prior.

KT: I know, I get my statements and say to Suze, “They took so much out for Medicare!” I pay nearly $500 a month!

Suze: That’s what happens when you make too much money! That’s the highest possible Medicare premium. But yes—converting large sums to Roth IRAs will affect your income and may increase your premiums for Medicare B and D in future years. It's important to plan for that.

Also, just to clarify—Marisol—you are converting, not rolling over. Rolling over usually means moving funds from one retirement plan to another of the same type, like from a 401(k) to an IRA. What you're doing is converting from pre-tax to post-tax. So yes, each time you do that, it's a taxable event and the five-year rule starts for that converted amount.

Suze: All right, KT. We made it through that one. Want to take us out?

KT: Remember everyone, there’s only one thing that you have to keep in mind.

Suze: What is that, KT?

KT: People first, then money, then things.

Suze: And then what happens?

KT: You will be unstoppable.

Suze: That’s my girl. See you all soon. Bye bye.