Podcast Episode - Ask Suze Anything: Roth IRAs

IRA, Podcast, Retirement, Roth, Roth IRA

March 07, 2019

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This episode of Ask Suze Anything is all about Roth IRAs.

Podcast Transcript:

Today is Ask Suze Anything. And when I say ask Suze anything, I usually mean that you can ask me about anything that you want to ask me about. But as I'm looking through your emails that you are sending in to asksuzepodcast@gmail.com and you know that I am answering some of you personally, by the way all I ask please stop writing three pages. This is not about me giving you a personal financial plan. This is about if you have a question, a simple question, just write in and I will answer it to the best of my ability either here on the podcast or directly to you. But as I'm going through these emails, there are so many emails about Roth IRAs, IRA rollovers, retirement accounts. So today's podcast is Ask Suze Anything about retirement accounts, because that seems to be what is on your mind. Also there have been a lot of questions about wills and trusts. Where do you get one? Send us the hyperlink. You want to be able to buy my package if you want. You can watch me on QVC March 9th at two o'clock PM Eastern Standard Time. So adjust that for whatever time zone you may happen to be in and you'll be able to see what's inside my little gold box. Also do not forget March 16th, if you're in the New York area at the Apollo Women & Money at five p.m. Tickets are $20. If you buy them online, $30. The day of the event, come on down and join us. Another favor is, I’ve been asking all of you is to if you like this podcast, please go to Apple podcast, rate it, review it, do whatever you want but let people know that it exists. All right let's start. Probably out of all the retirement accounts that are available to you, and please listen closely here, out of all the retirement accounts that are available to you, I love the Roth retirement accounts more than any other retirement accounts out there. Now you can go back and listen to previous podcasts, but I can also just give you a very simple overview of why I love them so much. When you look at the money that you have in a retirement account, it's not how much you have in that account, it's how much of that account do you get to keep. There is a law of money and I know I am repeating this, but I'm repeating it because you need to get this. There is a law of money that goes like this. And this is my law of money. It is better to invest in the known versus the unknown. What is the known? The known is your income tax bracket today. What is the unknown? The unknown is, what will your income tax bracket be 10, 20, 30, 40 years from now. What else is the known? The government knows exactly how much money you have in your retirement accounts. And they know that by April 1st after the year that you turn 70.5, listen closely to me, you have got to start withdrawing money from your traditional IRAs, 401ks, 403Bs, Thrift Savings Plans. And you have got to start withdrawing that money according to a specific formula set up by the government. If you do not take out as much money from these accounts as you have to take out, it's a required minimum distribution. You can take out more, but it is required that you take out by a formula, a minimum distribution. If you do not take out that minimum distribution that is required, you will pay a 50% penalty tax on the amount of money that you took out versus what you should have taken out. Now as we go on in years here, the government gets in trouble. They don't have enough money to pay their bills, like now. They're broke people. The United States government is totally broke. And how are they going to continue to pay bills? They will look at all sources of possible income for them to generate taxes to be able to pay their bills. When they know exactly how much is in traditional retirement accounts, and for those of you who don't know a traditional retirement account is an account that you fund with pretax dollars. You get to take that deposit off of your income, so you pay less taxes. And you love that. You just look at how much money you are saving in taxes, and then what do you do, you just go out and you waste that money. You do whatever you want with it. But what you don't think about is over all the years that money is growing, you cannot withdraw that money prior to the age of 59.5 in most cases, without a 10% penalty tax. Whenever you withdraw that money, you are going to pay ordinary income tax on it. When you die, and you pass it down to your kids, they are going to have to withdraw this money under a specific formula, and they're gonna have to pay ordinary income taxes on it. If you are married, your spouse gets to take over the traditional IRA as if it was his or her own. But eventually, when they turn 70.5, they're going to have to start making withdrawals and pay income tax on it. So the government knows very well how much all of you have in traditional retirement accounts that have to start making required minimum distributions, and how much tax revenue with that will generate for them. When it comes to a Roth retirement account, you fund that with money you have already paid taxes on. And what that means is that it gets to grow, and grow, and grow tax free. And when you go to take it out, you don't pay any taxes on it. Oh, you don't want to take it out. You don't have the same rule of required minimum distributions of April 1st after the year you turn 70.5, because the government doesn't care about you. They don't care about you because you've already paid the taxes on that money up front. So you are not required to have to take money out of it. When it goes to any of your beneficiaries and they take it out, they get to take it out tax-free. And any money that you originally contribute to a Roth IRA, you can withdraw without taxes or penalties at any time you want regardless of your age or how long that money has been in there. That is the reason that I love Roth retirement accounts. I want to know that what I have in that account, the balance that I see is mine. I do not want to know that one day tax brackets have gone up from 30 to 40 to 50 to 60 to 70% or whatever. Now again, I am repeating this from a podcast that I did just a little bit ago. But it is important, and that is why I am repeating it, right? The first question comes from Natalie. I inherited an IRA when my father passed away 10 years ago. And every financial advisor I've had since then has told me I can't convert it to a Roth IRA. I already fully fund my own Roth IRA, but I want to convert this one to avoid additional taxes on it when I retire. I have since left both of those advisers, and manage my investments myself. And I am wondering if they were being honest with me, or if they wouldn't let me convert it because they'd lose money. Natalie, Natalie, they were absolutely honest with you. If this had been your spouse, you could have taken over this account as your own IRA, then eventually you could have converted it. However, it was your father. As I recently said in the beginning of this podcast, that when you inherit an IRA, a traditional IRA, What happens is you have got to start making withdrawals according to a specific plan. So no, it cannot be converted to a Roth. If your father had had a Roth and then he died and he left it to you, you could withdraw the entire thing, 100% of it. And you wouldn’t have owed one penny of income tax on it. This is what I'm talking about, everybody. Next from somebody by the name of gaming moments. I don't know what that means. But anyway, this person asked me why can't we leave our investment with previous employers and should I transfer it to my Roth or my current employer? Here's the problem if you have a 401k. With a previous employer because that's probably what you have, you can leave it there if you want. The problem is this all employer sponsored retirement plans, 401ks, 403bs, Thrift Savings Plans. All they offer you is either the employer stock and or mutual funds. The reason that I want you to transfer or do an IRA rollover with a previous employer’s retirement plan is that when you transfer it or roll it over to a discount brokerage firm, the whole world of investments opens up to you. Not only can you buy those exact same mutual funds, but you can buy exchange traded funds, certificates of deposit, individual stocks, you can buy individual bonds. So that is why I don't want you to leave it with your previous employer. When you say should you transfer it to a Roth or to your current employer, of course you could transfer it to your current employer. But why? Your current employer also only offers you mutual funds or their employee stock plan. That's it. Why not take advantage of this, and go to an IRA rollover? You have got to be careful, because if you put it into a Roth IRA rollover from a traditional 401k plan, you are going to owe taxes on 100% of it. So if I were you, and you have a traditional 401k with a previous employer, I would do a custodian to custodian transfer with a discount broker into a traditional IRA rollover, and from there, I might start to convert small amounts of money into a Roth. I would check with my CPA before I did anything. Now what is a custodian? Who is a custodian? A custodian is a brokerage firm that has the custody of your money. So a custodian could be anybody. It could be Vanguard, it could be a bank, it can be an insurance company. My favorite custodians are discount brokerage firms such as Fidelity, Schwab, TD Ameritrade. Wherever you can get the best deal. So when you do a custodian to custodian transfer or a custodian to custodian IRA roll over, the original custodian of the money is your ex-employer. The new custodian of your money is where you opened up the IRA rollover at a discount brokerage firm or some financial institution. Hi Suze, my name is Lauren and I'm 30. My question is I have $2,125 in my Roth IRA. I realized that I don't have the luxury of investing in my Roth anymore because of my debt. Should I take my Roth IRA except the earnings and apply it towards my $20,000 of a private student loan, or some of my emergency fund and the rest towards the debt with the highest interest rate? Lauren, Lauren, Lauren, listen to me. The money that is in your Roth IRA, even though you are 30 years of age, you can take out whatever money you want, not the earnings but any money you want of what you originally contributed, without any taxes or penalties whatsoever. So you could consider that like an emergency fund. So no, I would not take money out of my Roth to add to an emergency fund when you can use your Roth IRA as an emergency fund. Do I want you to take it out so that you can pay down your private student loan? I would not take money out of my Roth that I need for emergencies, or later on in life to pay down my student loan. Just keep doing what you are doing. Little by little all of your money that you are in debt will go away. All right, here we have one from Christie. Dear Suze, I have just recently gotten on the podcast bandwagon, and I found your Women & Money series which I have really enjoyed and I'm learning a lot from, I love that Christie. I'd like to think that I'm a pretty smart gal, but when it comes to retirement accounts I am a bit clueless and mystified. Here's what I do know. I'm approaching 50 years of age. My employer does not offer a 401k. Before I was married, listen carefully. Before I was married, I had a roth IRA but rolled it over to a traditional once I got married because I no longer qualified for a Roth due to our collectively earning too much. Christie, Christie, Christie. You need to listen to me. It's true. You are clueless when it comes to retirement accounts because listen. When you contribute money to a Roth IRA and you qualified for a Roth IRA because your income allowed you to make that contribution, you are allowed to keep that money in a Roth IRA forever no matter what you are currently making right now. You did not have to roll it over to a traditional IRA. Are you kidding me? You absolutely lost all the tax benefits that you could have had with that Roth IRA. Why would you have done that? What does that mean you were earning too much? Maybe you don't qualify for a Roth IRA now, but once your money is in a Roth, even if you are making $10 million next year, you get to keep the Roth IRA that you qualified for. Now some of you may be wondering, well, how do I know if I qualify for a Roth or not? All right, listen. In 2019, this year, you qualify to have a Roth IRA if your adjusted gross income is between $122,000 a year, and $137,000 a year. If you are single, if you are married filing jointly, it's 193,000 a year of adjusted gross income, all the way up to $203,000 a year. You are allowed to put in a full $6,000 this year. If you are under $57,000 this year, if you are 50 or older, so if you are single and your adjusted gross income is under 122,000, you could put in six or 7,000 depending on your age into a Roth. If you are married filing jointly, you could put in a full six or $7,000 depending on your age if your adjusted gross income is under 193,000. Once you make over 137,000 of adjusted gross income, married finally and jointly 203,000, you no longer qualify for a Roth IRA. So Christie that was a big mistake that you made. So yes. Do you have this wrong? Oh you betcha you do. This one's from Dorothy. Hi Suze. If I have 401ks at multiple financial institutions and I am no longer employed at the company's associated with those plans, is there an annual limit to the number of direct custodian to custodian rollovers to my IRA? No there is no limit. What you would do is though you would open up one IRA rollover and you would just really have your custodian where you open up the IRA rollover, contact your financial institutions and do a rollover into one IRA rollover. Alright this one is from Jody. Hi Suze, thank you for helping empower women with their money. You are most welcome, Jody. I am recently divorced and received the money in our IRA accounts as part of our settlement. I am 57, I make $25,000 per year. I have 36,000 in a traditional IRA and 53,000 in a Roth IRA and contribute 200 per month for now into the Roth account. Should I transfer the traditional IRA money into the Roth IRA? I know I will be taxed on that money in 2019. Is it worth it Jody? If you think you're going to be working another 10, 15, or 20 years and you're making $25,000 a year right now, which is hardly anything if you could just take little amounts of money. I don't care if it's $5,000 a year, 4,000 year, 6,000. Consult with your CPA and get it out of the traditional IRA into the Roth IRA. I think it would make all the sense in the world because now let's just say little by little you pay a little bit of income tax on it, and now all of a sudden you have, let's just say $100,000 in your Roth IRA, and now it's invested and now it's growing and now you're 70 years of age, and now maybe you have 100 and 50,000 or who knows what you have in there, you can have access to all $150,000 absolutely tax free. Let's say at that point in time Jody, you see a little condo or something that you want to buy and it's $150,000 depending on where you live because I don't know where that is. You could take out all 150,000 or whatever in your Roth IRA and buy something outright. Or if you currently own a home, maybe you could pay down the mortgage on that home and then you could stay in there if that money continues to grow in the traditional IRA. And let's say you needed it and now it's 50,000 or $60,000 and you needed it all. All of that will be taxed as ordinary income. So yes, little by little. Do not transfer all $36,000 at once because that will put you in a higher income tax bracket. But check with a CPA how much can you take out of your traditional IRA every single year To convert to a Roth IRA without putting you in a higher income tax bracket. Maybe there is a way for you to do it where it really won't cost you much at all. I like Jody's thinking there, I have to tell you. All right, one more. Hi, Suze. My name is Brooke and I am 28 years old who is obsessed with being financially smart and independent. But I need your advice before I go on. Do you know how good it makes me feel when somebody is 28 and they really, really want to be financially independent? I love that. I am self-employed. I own a condo in Carlsbad debt-free and have 18 months of an emergency fund set away. Brooke, you're my kind of woman. I opened a Vanguard Roth IRA target retirement account when I was 25, putting away $200 a month. I am worried I am not doing enough for my retirement. I could only afford a condo with a 30-year mortgage and I wish I could have afforded a 15 year mortgage. My question is, should I continue to put $200 in my Roth IRA each month, or should I add an extra $100 of my principal to my mortgage and $100 to my Roth IRA each month? I make $60,000 a year and it is difficult for me to put more away, even on a frugal lifestyle. Thank you for being such a role model to look up to. I love you, Brooke. Right. Girlfriend, listen to me, here's what I want you to get. First of all, you say that you wished you could have afforded a 15-year mortgage. Listen, you are 28 years of age, claims are 30 years from now, 40 years from now. You might not even still be in that condo. I mean I bought a house, I bought another house, and then I bought another house. Things change in life. So at 28 years of age, I would not be worrying about paying down the mortgage on my condo unless you want to get into the real estate business and you want to own it outright or whatever else it may be. But here's what I do want you to understand, you're so worried that you're not gonna have enough for retirement. Okay? You said you started to fund your Roth IRA when you were 25 or $200 a month, that means you have $7,200 in your Roth IRA. You are continuing to add $200 a month. Now let's just say you never, ever were able to put more than $200 a month. And although I have no doubt that is not true, but let's just say for the next 40 years, 40 years Brooke when you'll be 68, you're gonna be as old as me right now if all you did was $200 a month. And over all those years you averaged just 8% annual average rate of return on your money. You'd have about $805,000 in your Roth IRA totally tax free, totally tax free. If you could somehow manage to get 10% annual average rate of return, you'd have $1.5 million. If you did 12%, you'd have millions and millions of dollars. So I would stick with the Roth IRA, and I would make it my goal to go from $200 a month, 250 to 300 to 350 to 400 until you are maxing out your Roth IRA every single year. And while you may be looking up to me as a role model girlfriend, I most certainly admire what you are doing. Oh my God, you're at 28. I would not be worrying about your future if I were you. Today's podcast was all about retirement accounts and things that you need to know, especially about Roth IRAs, IRA rollovers, backdoor Roth IRAs, all of those things. This is the type of podcast that you should listen to over and over and over again because what I've noticed in some of your emails is that you aren't list closely enough. You're thinking I said one thing when I'm saying another. You have got to listen closely so you do not make mistakes. So you don't do something where you do an IRA rollover and you think now you didn't have to pay the 20%. So now you get to take everything out tax free. Wrong, wrong, wrong. That would be such a Suze Smackdown. I can't even tell you the information is there. If you need to read it, get my Women & Money book. You need to take my course where I really go into explanation about everything. Then take my course. All you have to do is go to suzeu.com. That's S-U-Z-E-U with a U dot com and then put in the code Women & Money. So you could do an ampersand or you could do women and the word and money and now you can register for free. Take all seven of those courses, take advantage of it. Everybody. It's free to you. Over 300,000 students are taking it. But then you can listen to things over and over and over again. Okay? Or you can listen to the podcast over and over again. Alright, this was Ask Suze Anything podcast. See you Sunday.

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