Podcast Episode - Suze School: Don’t Become Partners with Uncle Sam

In this Suze School episode, Suze explains why a Roth retirement account ultimately gives you more money than a pre-tax retirement account. 

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Podcast Transcript:

Welcome everybody to the Women and Money podcast, as well as everybody smart enough to listen. Suze O here. So get out your Suze notebooks. And let's begin.

I'll give you a two count beat there. All right, you should have them out by now. So, what a week, what a week in the stock market? It's a week where we love the Magnificent Seven and now we're hating the Magnificent Seven because they are going down big and they are taking the markets with them, and many of us don't know what to do. We're afraid, we're looking at the balances in our 403Bs or 401ks or TSPs or IRAs going down and we are getting absolutely nervous.

Now, I'm not gonna lie to you. Never have. Never will. We could be entering a very volatile time in the stock market. Absolutely. We might see a little bounce here, but really there's a saying, "sell in May and go away." I don't know, that comes from Wall Street, but they always feel like the month of May, you should be out of stocks. But when they're out of stocks, that means they're traders, they're on the floor, they buy, they sell, they do all of that. And so they sell, they do other things with the money and then they come back eventually. That's not who you are. That is not who I am. You don't sell in May and go away. What you do is you look right here and right now at what you have and you have to ask yourself the question. Do I like what I own? Do I feel secure with it? Am I happy that it's gone down some? Because now I can buy it.

I'm so glad that NVIDIA has come down from its high of $974 a share all the way down to $762 a share. And so now you're thinking, oh, maybe I'll buy some more. So there's always opportunity in the stock market. It just depends on when you want to realize that opportunity.

I have told you over and over again. The only way to be investing in the stock market is through dollar cost averaging where every month or every three months or every six months, if there is something that you own and it goes down, you buy a little more. If it continues to go down, you buy a little more. So here's a little thing that every one of you needs to do.

I want you to look at every single stock that you have, every single ETF that you have right here and right now, because the truth of the matter is you don't know what the stock market's gonna do next week or five weeks from now, or three years from now. But right here and right now, you know exactly what you have. So let's say you have a stock and it's worth $20,000 today. I want you to ask yourself the question if you did not own that stock today and you had $20,000 in cash, would you buy that stock today?

If the answer to that is yes, then you keep what you have. If the answer to that is no, I would not, then you better think about selling it seriously. And if the answer is, I don't know what I would do, then just sell half.

Obviously, you have to remember that if you have a stock that is outside of a retirement account that you have not held — write this down — that you have not held for over one year, if you sell it and you have a gain in it, you are going to pay ordinary income taxes on that gain. Maybe you're gonna lose 20% to taxes. So maybe you just keep the stock because if it goes down 20% it would be the same as if you sold it and had to pay ordinary income tax on it. You have to think about that.

Maybe you have a stock that you have a loss in — again, outside of a retirement account — and you wouldn't buy it again. All right. Sell it and take the loss off your taxes. Just that simple. Maybe you have a stock then that you have a gain in that you wouldn't buy again. All right. Sell that possibly and offset your loss with your gain. But you have to look at what you have and not just sit there and not know what to do.

If it were up to me telling you all what to do, I would say if you own good quality stocks, ETFs, mutual funds. If you have 10, 20 or 30 years or longer till you need the money, can you just sit tight and as the markets may go down, you might want to buy more. You could sell it here if you wanted to. But I'm here to tell you, chances are you're not gonna get back in and it goes up above where you sold it. You are not gonna be a happy camper.

Now, I can tell you that because I did that myself years ago. I bought a stock and I watched it go up and up and up and up and it had gone all the way up to like, $1100 a share. And now I have a whole lot of gain in it, even though I'd have to pay taxes on it. And now I'm getting nervous. I just got nervous. I don't know why. And so I decided, oh, I'm gonna sell it even though I like the stock. I sold it and I had to pay capital gains tax on it. Ok.

And then the stock started to go down and down and down. And I was so happy that it was going down because it proved that I was right that I should have sold it and all of a sudden it's going down a few hundred points. Ok? And then it turns around and it goes right back up to $1500 a share. And I'm like, no, no. Are you kidding me?

Don't think you're gonna be out guessing what these stocks, ETFs, these markets are gonna do. You cannot out guess it. So prepare yourselves, put on your financial safety jackets because just in case it gets a little bumpy, you'll be ok, you'll be ok, especially if you're dollar cost averaging.

So I just want to say that to you and just know when these markets go down, especially in retirement accounts where you are investing month in and month out or every paycheck however you do it and the money's going into ETFs, you should be so happy. I meant what I said on Erin Burnett the other night on CNN that if these markets go down and you're dollar cost averaging automatically from a paycheck in a retirement account, the more it goes down, the more shares you buy. And eventually when it turns around, the more money you make.

One thing that is very important when you are looking at your statements — and this just happened with KT, believe it or not — about three weeks ago. She comes into my little office and she says, look at this. I said, what do you want me to look at? She said, look at the statements, Suze. KT goes over them like a hawk. I'm telling you, every single month, every single line she's looking at — we lost here, we gained here, whatever it is — and that's fine. I like that she does that and she takes an interest in it. She goes, can you believe how much money we have made since January?

And I looked at her and I said, KT, we haven't made a penny. She says, what are you talking about? Look at this, Suze. I said, KT, we only make that money when we have sold and we're not selling. We like what we own. If it goes down, we'll buy more of it, but we are not selling. So don't look at it like we have that much money because until we sell, we don't have that much money.

And I think a lot of what has been happening in the United States of America — believe it or not in terms of inflation — is that so many of you have been looking at your 401k statements or 403b or TSP statements or whatever they are and they've gone up so much over the past six months that you actually feel wealthy and because you feel wealthy or maybe wealthier than you ever felt, then you feel OK about going out and spending money.

That's why on some level, I have to tell you, I don't think inflation is necessarily coming down because the economy is still too strong and it's strong because of how much money is being spent.

Please remember everybody that what you see, especially if it is a pre-tax retirement account, what you see is not what you get. You do not own all of that money.

You are in partnership with Uncle Sam on every single penny that is in a pre-tax retirement account because later on in life, when you have to take it out, remember, you don't have a choice. You have got to eventually take required minimum distributions. Your partner in crime here is Uncle Sam and he will take whatever percentage that is in there that he wants to at that time.

And when you have debts and deficits that are facing the United States of America like they are right now, do you honest to God believe that 30 years from now, 20 years from now, tax brackets won't be higher than they are right now?

But all of you argue with me. You argue with me and say, Suze, I'm in a high tax bracket. I'm 50 years of age. I want my tax bracket now. Going into a Roth retirement account. There's no time. It makes no sense. I know what I'm doing and my financial advisor tells me you're wrong, Suze Orman.

Do you have any idea how crazy, how absolute crazy that makes me?

So therefore, I'm going to do a comparison right now between a Roth retirement account and a pre-tax retirement account for somebody who's just starting right now in their fifties and settle this stupid argument once and for all.

However, before I do that, there is something that I need to do. There is a woman by the name of Paula whose husband died a few months ago and Paula wrote and said I need help, Suze. I don't know what to do with this and these things. I have three or four kids. Can you please help me?

And I called Paula to help her. But the problem is Paula isn't necessarily sure that it's me. She is in shock. Number one, she can't believe that Suze Orman called her. And number two, Suze Orman said to her, Paula, you can't trust my voice because of artificial intelligence. I don't even know if I were to facetime you, you would be able to trust it because of everything that's going on with artificial intelligence.

So I know what I'll do Paula, on my podcast today, I will talk about this so that, you know, without a shadow of a doubt, it was me who is telling you what to do. So I just wanted to get that in and not forget it.

All right, I want all of you right here and right now I want you to write down everything that I am about to tell you.

Because if these numbers work at 50, think about if you started a Roth retirement account at 25 or 30 or 35. So worst case scenario. And this is a real example. And this just happened to me on Friday on a telephone call that I was having with somebody who wants me to do something for their company. All right.

And then of course, we always talk about their own money somehow. I don't know why that is — always at the end of the conversation, they tell me what they're doing. And then I'm like, you're kidding, you're not doing that, are you? And then I try to set them straight. So in this particular situation, this person's financial advisor has convinced them that the best thing that they can be doing is putting money — maxing out their 401k at work pre-tax.

And when I said what? And they said, Suze, I'm 50 years of age, I'm getting older now. I make approximately $300,000 a year. It's a huge tax write off for me and I've gone over the numbers and this is what my advisor is telling me to do. Well, after 30 minutes of arguing with him, he still didn't believe me. I can tell you that. So let me just do the numbers for him. But for all of you as well, I want you to write everything down.

This person that I spoke to was 50 years of age and he makes approximately $300,000 a year. Now, listen, if it works with $300,000 — which is a good sum of money, puts this person in a high tax bracket — of course an advisor would say you want a tax write off. If it works in a high tax bracket, it even works better in a lower tax bracket. Ok. So he makes $300,000 a year and he is putting $30,000 a year, which is the maximum that you can put into a 401k this year and he's doing it every year for the next 20 years. Let's just make that assumption because I don't know what the maximum will be in future years. So just let's assume that that's all he puts in for the next 20 years.

We're not gonna consider a match. Let's just pretend that his company does not match. And let's also assume that over those 20 years, he's averaged approximately 7% on his money. Let's just do that for simplistic sake. Ok.

If that were true, at 70 years of age, he would have approximately $1.3 million and now he's no longer working and he simply does what he takes the $1.3 million and he rolls it over to an IRA rollover because he now wants to invest it very securely because he doesn't want anything else to happen to it.

So now he rolls it over and he invests 4% of it in treasuries. Ok? And at the age of 75 he now has $1.6 million. Now just put a pin in that for one second.

Remember if you were born 1960 or later, the new required minimum distribution age is 75. So because he is currently only 50 he will not need to take out required minimum distributions till he is 75. And let's just assume he did very well for himself. He made all of this money and he's invested it wisely. He owns his house outright. Very little expenses. Everything is great for him. And he so wishes that he didn't have to take out required minimum distributions because he doesn't need to. But yet he does not have a choice. He has got to take out required minimum distributions. And he has lived his life in such a way. Let's just assume this, that he has other income, but he only has $50,000 a year of taxable income besides his required minimum distributions that he will be taking out.

If he starts to take out required minimum distributions, which he has to at the age of 75, the very first year he will take out approximately $58,000 and then $60,000 and then $62,000 and every year as he gets older it goes up approximately 2 to $3000 a year.

And the IRS truthfully according to life expectancy tables, expect him to live till about, let's just say, 89 years of age. And by that time, he's required to take out $100,000 as a required minimum distribution. Now, the true question becomes, how much did he totally have to take out of this account in required minimum distributions? And the answer to that is $1,202,897. It was required over those 14 years to take out $1.2 million that he will owe ordinary income taxes on at whatever tax bracket Uncle Sam puts into place again.

However, we are going to assume that tax brackets stay exactly as they are right now, which is the lowest income tax brackets any of us have been in, in years and we're just going to assume they stay this low. Although I would make a bet with any of you that is not going to happen. But I'm just going to give this example assuming that we stay at the tax brackets we are right now. And if that is true, he's going to end up paying at least $313,000 in taxes over the next 14 years as he's taking the money out.

Now again, what did he save in taxes when he put the money in? He saved approximately $144,000. Now, that's a lot of money. But do you understand that? Really? What's happening here is Uncle Sam is just giving you a loan, a loan in this case of $144,000. And over the years, Uncle Sam's gonna get back at least $313,000. Think about that.

When you put money in a pre tax retirement account, you put in an amount of money — please listen to me closely. Now you're putting in money and it is growing and growing and growing and growing in this example. This person only put in $600,000 over those 20 years. But because of compounding, it's now worth $1.6 million at the age of 75.

So Uncle Sam is going to get taxes on that extra million dollars of growth above what he put in. Do you see that? He put in 600,000? It's now worth $1.6 million. Forget the 600,000 he put in — it grew by $1 million and Uncle Sam gets to have taxes on that $1 million. Plus he gets back the taxes he gave you over all those years on that $600,000 that you put in. Think about it. Think about it.

Why do you think they want you to do this? Because they know exactly. They are going to make a lot of money off of you. Do you all hear what I'm saying?

Even if he had saved $200,000 in taxes, that's still a lot less than $313,000 that he will owe. And in reality, 20 years from now, he may owe a whole lot more. But wait, I'm continuing on with this example, even though he took out approximately the $1.2 million in RMDs, he still has remaining in that account about $433,000 because that money has been growing all those years that he's been taking out RMDs.

And now let's assume that he dies at the age of 89 and now his children get the money. They now have to continue to take the money out of this inherited IRA that they just got and they have to wipe it clean totally within 10 years. So, chances are they're gonna take out 45 to $50,000 a year. If they do that, we don't know what tax bracket they're in. But let's just say they're in an average tax bracket as well. They're gonna probably pay at least another $100,000 in income taxes to get that money and truthfully everybody, probably a whole lot more.

So, given that between what this guy is going to pay in income taxes — $313,000 — at least $100,000 his kids are gonna have to pay. Now, they have paid jointly $413,000 in taxes based on today's tax structure versus the $144,000 or even the $200,000 of a tax write off that he got. Am I making sense to all of you?

So now you're saying, well, Suze, you want him to do a Roth, you're Roth crazy. So do the numbers for me with a Roth. Oh, thank you very much for asking.

Ok, he's still 50, he makes $300,000 a year. No problem. But instead of putting in $30,000 a year for the next 20 years, we have to take away the $7,200 in tax that we're gonna have to pay on that $30,000 now because we did not do a pre-tax 401k. So for the next 20 years, he's only going to be investing $22,800 a year in the Roth 401k versus the $30,000.

Ok. Still an annual average rate of return of 7%. Just stick with me here. This is just an example. Don't go crazy. It's just trying to equal things out. All right everybody — at the age of 70 he would have only $1 million in his Roth 401k versus the $1.3 million he would have had in his traditional 401k. All right.

But now he takes it and does an IRA roll over with it, makes again 4% on it. Put it all in treasuries and at the age of 75 he now will have $1.2 million versus $1.6 million. $400,000 difference. Ok.

But here's the big difference. He doesn't want to take RMDs out. He doesn't want to touch the money. He actually wants to leave it to his kids. He doesn't need it.

All right. Now, the $1.2 million at just a 4% interest rate — it's in treasuries, it's in a CD — so at the age of 89 it's going to be worth $2.1 million and now he dies. Now, guess what? Now it passes down to his kids and because it's in a Roth IRA, they don't have to touch it for 10 years. They don't have to take out any required minimum distributions. So they just leave it there — because they were listening to the Women and Money podcast and they heard Suze Orman say, if you're ever in this situation and you don't need it, just leave it there till the 10th year if it's in a Roth — and then take 100% of it out in the 10th year. All right.

So 10 years from now when they inherit $2.1 million, their inherited IRA, because it's a Roth, will be worth $3.1 million. Everybody — that will pass to the kids absolutely tax free.

I just want you to think about that. Big, big difference. Now, a lot of you will say, but yeah, Suze, he took out the 50-some odd thousand a year or whatever and maybe he invested it. I don't care. I don't care.

I just want you to stop finding excuses for why you think a traditional or a pre-tax retirement account is the way for you to go. I want you to stop the excuses of you are 60 years of age, you're 50. You make too much money. It's too late. It is never too late to be smart with your money. Do you hear me?

So you can continue to do what you're doing. But I'm here to tell you if you really want to be smart with your money, you will listen to this podcast over and over again. You'll do the numbers. Maybe you won't agree with me with the numbers. Fine. Do the numbers yourself.

But I am telling you, in the long run, don't become partners with Uncle Sam. Be in business with yourself. Buy Uncle Sam out every single year so you don't have to deal with him anymore.

You know, just think about it that way and then no matter what, it's 100% yours. When you look at your statements, it's 100% yours. For those of you who have traditional 401ks or whatever it is — when you look at your statement, you better take a good 20 or 30% away if not more because that's Uncle Sam's cut.

Was it worth it for a tax write off? Really? Not in the long run?

All right everybody. There's only one thing that I want you to remember when it comes to your money and it is this: people first. That's you everybody — not Uncle Sam — that's you. People first, then money, then things. Can you tell that this topic has absolutely aggravated me?

All right. So just stay safe and if you listen to me, you will become financially unstoppable.