Podcast Episode - Suze School: Loans vs. Withdrawals From Roth Retirement Accounts
401k, Retirement, Roth, Roth IRA
July 09, 2023
Listen to Podcast Episode:
Suze’s lesson for this Suze School episode is all about the difference between loans and withdrawals from Roth retirement accounts.
Podcast Transcript:
00:00:00
Music: Music (in).
00:00:28
Suze: July 9th, 2023. Welcome everybody to the Women and Money podcast as well as everybody smart enough to listen. Today is Suze School. Now,
00:00:43
Suze: today I was planning, I don't even know why I plan to do anything because it always changes. Everybody will tell you I always change because I'm a Gemini, but I always change, especially a podcast based on what I feel people really want to know in the moment.
00:01:02
Suze: So today I was going to do a Suze school on the differences between irrevocable trusts and revocable trust, especially when it comes to special needs kids because three or four of you wrote in and I think it may have been on the wall that you wanted to learn about it.
00:01:25
Suze: And so that's what I was gonna do. I think I even said to you that's what I'm gonna do except last Thursday,
00:01:33
Suze: we did a Suze and KT show
00:01:37
Suze: and there we were and the quizzie for KT was all about this person who wanted to take money out of their Roth 401k just $45,000 to pay off a, HELOC, a home equity line of credit that has gone up in interest from 3% to 8%. And the truth of the matter is given what's going to happen with the feds and everything. It's gonna even go higher than that everybody.
00:02:06
Suze: And I thought I answered the question simply by saying, in your situation, you cannot just do a withdrawal, you need to do what you need to do alone.
00:02:18
Suze: And a lot of you wrote in and said to me, Suze,
00:02:23
Suze: why can't we take out money from a Roth 401k? Exactly like we take money out of a Roth IRA. I thought that's why we did a Roth 401k.
00:02:38
Suze: So before I begin Suze School, when I say 401k, obviously, a 401k is an employer sponsored retirement plan,
00:02:51
Suze: but A 401k is for profit corporations. A Roth 403 B is for nonprofit corporations and a Roth TSP is for government workers as well as the military.
00:03:07
Suze: So when I say a Roth 401k in the Suze School, please know that. I also mean A Roth 403 B and A Roth TSP. Got that everybody. All right. Take out your Suze notebooks because you're gonna need it for this one
00:03:29
Suze: To begin with, I don't want to assume that all of, you know what a Roth is but you need to understand that when you have a Roth retirement account,
00:03:41
Suze: whether it's an individual retirement account or a 401k, when you see the word Roth, that means that it has been funded with money that you have already paid taxes on.
00:03:56
Suze: If it is not a Roth IRA or a Roth 401k, then it's what's called a traditional Ira or a traditional 401k, which means it has been funded with money. You have never paid taxes on
00:04:15
Suze: for a Roth. The reason that I will always tell you and I will believe forever in a day, no matter how much money you make. That, the reason a Roth is fabulous is because you can contribute money to it
00:04:32
Suze: and it will grow and grow and grow because you have invested it hopefully. And when you go to take it out later on in life,
00:04:42
Suze: especially if you are 59.5 years of age or older, especially if the account has been open for at least five years, every single penny that you have in that Roth, you could take out in one lump sum if you wanted to. Absolutely tax free all of it. If you were to die at any time
00:05:08
Suze: and you leave it to a beneficiary, they can take it all out absolutely tax free.
00:05:15
Suze: That is not how a traditional IRA or a traditional 401k works.
00:05:24
Suze: You cannot take money out any time without taxes. In fact, if you take money out prior to the age of 59.5, you will pay ordinary income taxes on it as well as a 10% penalty. If you die and you leave it to your beneficiaries, they will pay ordinary income taxes on whatever money they take out as well.
00:05:53
Suze: So we're just gonna concentrate however, for this podcast on Roth IRAs and how they differ from Roth 401k Plans
00:06:06
Suze: In a Roth IRA, which is an individual retirement account
00:06:11
Suze: where you can open it up at any brokerage firm credit union, any place that you want
00:06:17
Suze: within a Roth IRA, write this down,
00:06:22
Suze: any money that you originally contribute,
00:06:27
Suze: you can take out any time you want without taxes or penalties whatsoever.
00:06:35
Suze: Let's just assume for an example,
00:06:38
Suze: you're still young, maybe you're 40 years of age
00:06:43
Suze: and you've been putting in only, even though you can put in more, you've been putting in only $5000 a year
00:06:51
Suze: when you are 40 41 and 43. So now you put in your original contributions are $15,000 in total.
00:07:03
Suze: But the account value in your Roth IRA right now is $18,000. That extra $3000 is what you made by investing this money.
00:07:17
Suze: And now you need, you're 43 years of age, you need to take some money out.
00:07:25
Suze: You can take out anything up to the $15,000 that you originally contributed without taxes or penalties whatsoever.
00:07:41
Suze: That means it's your money, you can have it back. It's not a big deal.
00:07:46
Suze: You don't have to be 59.5. You don't have to have opened the account for at least five years. Your original contributions, you can take out at any time without taxes or penalty.
00:08:01
Suze: It is that $3000 of earnings that you made on that $15,000 of your original contributions that you cannot touch till you are 59.5 years of age or older. And the account has got to have been opened for at least five years
00:08:21
Suze: after that. You can take 100% of everything that's in there, your original contributions and your earnings without taxes or penalties whatsoever. And again, upon your death, all of it goes to your beneficiaries tax free.
00:08:43
Suze: That is not how a 401k Roth works. Let's just say the exact same scenario.
00:08:53
Suze: You've had the account for three years and you've only been putting in, let's just say $5000 a year, even though you could put in way more than that, you've only been contributing to your Roth 401k, $5000 a year
00:09:10
Suze: for the past three years. You're now 43 years of age. Ok.
00:09:17
Suze: So you wanna withdraw
00:09:21
Suze: $5000 from your Roth 401k thinking, oh, you can do that because that's how a Roth IRA works. You could easily take up to that $15,000 out because it's your original contributions in a Roth IRA. That's again, not how it works for a Roth 401k
00:09:41
Suze: because you are not at least 59.5 years of age and the account has not been opened for at least five years. The way they figure out if you withdraw money while in fact, you are still working for them,
00:10:01
Suze: it is called an unqualified withdrawal.
00:10:06
Suze: What an unqualified withdrawal means is that whatever amount you take out before you are 59.5 is a withdrawal and the account has been opened for at least five years. The amount that you take out will be prorated
00:10:27
Suze: between how much is made up of your original contribution and how much of that withdrawal is made up of your earnings.
00:10:38
Suze: Don't freak out on me here. This is the rule and you need to know it so you don't make a mistake.
00:10:47
Suze: So in this particular case, here's how you figure it out.
00:10:53
Suze: You take the $3000 of earnings in this example and you divide it
00:11:02
Suze: by the $18,000 that you have in the Roth 401k
00:11:10
Suze: and you will find that that comes out to be approximately 16.7%.
00:11:17
Suze: That means of the $5000 that you are withdrawing.
00:11:24
Suze: 16.7% of that
00:11:28
Suze: are $835
00:11:33
Suze: is going to be taxable to you as ordinary income. Plus you are going to have to pay a 10% penalty to the federal government on $835. Got that.
00:11:52
Suze: So it is not the same. What that means to you is that of the $5000 that you want to withdraw,
00:12:02
Suze: you will have to pay taxes and a penalty on $835 of it. And $4165 will be tax free to you. So you just have to decide, is that worth it to you or not?
00:12:19
Suze: The reason why I told the person who sent in the quizzie, I'm sorry, I don't remember their name right now that the best thing for them to do would be to take out a loan
00:12:33
Suze: because they wanted to take out $45,000. They didn't want to take out $5000 where the penalties would have been on only 800 some odd dollars. They wanted to take out $45,000
00:12:51
Suze: and the penalty and the taxes on that most likely would not have been worth it on any level.
00:13:02
Suze: So, one of the advantages to a Roth 401k is you can also take out loans from a Roth 401k. You cannot take a loan from a Roth IRA. You can only withdraw money from a Roth IRA that is really important for you to seriously understand.
00:13:28
Suze: Now, you may not need this at this point in time, but you should absolutely keep this Suze lesson because there may come a time where you have a lot of money in your Roth 401k and you really need a good sum of money, whether it's for a down payment on a home or to pay off some bill, whatever it may be
00:13:52
Suze: just don't go making the mistake thinking. Oh, I put in X amount of money in terms of contributions and I therefore can take it out all tax free without any penalty. Even though I'm not 59.5 years of age. And even though maybe the account hasn't been open for five years, you can not.
00:14:17
Suze: All right, that's your Suze School for today. However,
00:14:21
Suze: that doesn't mean the podcast is over.
00:14:25
Suze: Ok. So the jobs report came out on Friday. And what that means is that now the Feds get to see, oh, is there a strong labor market? Is unemployment going up? Is the unemployment staying the same? Is it going down? Because remember the goal of the Feds raising the Fed's funds rate is to curb inflation.
00:14:54
Suze: And one of the ways that they want to curb inflation is by getting the unemployment rate to rise. Nevers made sense to me. But ok, because if the unemployment rate rises, that means you don't have enough money to buy things. If you don't have enough money to buy things, then everything starts to come down in price.
00:15:19
Suze: And that's one of the ways they think they can solve high inflation even though inflation really is on the majority of levels coming down on its own.
00:15:30
Suze: So what is going to happen now, most likely when the feds meet again, they are going to raise the fed funds rate again,
00:15:41
Suze: maybe 25 basis points, maybe 50 basis points. They probably in the next meeting after that will raise it again. How does that affect you? It affects you in the exact same way that I've been telling you it's going to affect you. You're going to see interest rates go up and up. The good news, they could go up on savings treasuries, things like that,
00:16:07
Suze: but they probably in their own way will go up also on mortgages. One of the reasons that you're seeing interest rates go up on mortgages right now is because the treasuries are going up in interest rate. The 10 year Treasury is the highest, it's been in a long time above 4% a little bit.
00:16:32
Suze: Also, the 30 year Treasury is at about 4%.
00:16:38
Suze: Now a while ago, long time ago, the trend, if you looked at the technical indicators, the trend was that interest rates were going to go up
00:16:51
Suze: and now they're starting to go up again. However, I'm still gonna stick by the 18 month certificate of deposit at Alliant Credit Union for 5.15% currently is still a fabulous deal. And remember you can have the 18 month, 19 month, 2021 22 23 month and lock that in if you want. Ok.
00:17:20
Suze: But here's something that I just want to talk to all of you about.
00:17:25
Suze: I know the market's been going up.
00:17:28
Suze: I know that everybody is like, oh my God, maybe I'm missing out on the market. Maybe I should be doing this, maybe I should be doing that
00:17:36
Suze: dollar cost averaging into this market is still the only way to go because we don't know how these markets are going to react when
00:17:51
Suze: they raise the fed funds rate in a very short time from now.
00:17:56
Suze: So just keep dollar cost averaging in terms of energy, the price of oil, it's starting to go back up. I would not lose faith for those of you who are in energy companies. I would just stick by my conviction and enjoy the dividends that many of you are getting, which really was the main reason you bought them to begin with.
00:18:25
Suze: However,
00:18:27
Suze: I want to talk about right now being an all or nothing investor. When I say let's do this, let's do that, let's do a treasury, let's do an 18 month certificate of deposit, whatever it may be. I don't mean do it with all of your money.
00:18:46
Suze: I mean, do it with some of your money.
00:18:51
Suze: Always keep money on the sideline so that if interest rates do go higher,
00:18:59
Suze: then you have money to take advantage of that.
00:19:04
Suze: So don't go putting absolutely everything you have into just maybe one energy stock or one certificate of deposit or one treasury. Hey, if you want to lock in some money right now in the 10 year treasury and trying to get it at four, although I think it could go maybe to 4.3 but that's besides the point, maybe. Yes or maybe no, you want to do that. I don't have a problem with that on any level.
00:19:32
Suze: However, don't put everything that you were going to put into treasuries right now, into 1 10 year treasury. Let's just wait and see what happens. Maybe they will go to 5%. Maybe the everything will go a lot higher.
00:19:51
Suze: So I just don't want you to be an all or nothing investor. What does nothing mean? Nothing means you have your money sitting at some bank paying you 0.1 or 0.3% interest and you're just leaving it there because you're just really too lazy to take advantage of the higher interest rates that are out there.
00:20:15
Suze: All of you should at least have your money in money market funds, whatever it may be that's giving you at least 3% 4% 4.5% on your money
00:20:29
Suze: to have money. Just sitting at a bank account makes absolutely no sense. What so ever everybody,
00:20:39
Suze: so you need to look around, you need to see what are the things that you can do
00:20:46
Suze: to protect your money and to make sure that you are investing properly and to also make sure what that you understand if you need money, where do you go to get it?
00:21:01
Suze: But be very, very careful right now about credit cards and taking cash advances on credit cards. Because remember they're going to be raising the fed funds rate in my opinion. So the interest rates that you will be paying on credit cards in most cases, especially for cash advances will probably be 21 22 or 23%. And that just isn't worth it.
00:21:28
Suze: Obviously, you never want to do a payday loan. The tricks with payday loans where you go in and somebody will give you money for 90 days is that every 90 days it renews and because of that, it will never be able to be discharged in a bankruptcy.
00:21:47
Suze: All of this ties together because when the Feds start to raise the fed funds rate again,
00:22:00
Suze: it will have an effect all across the board.
00:22:04
Suze: Now, I know we're currently not in recession, although I'm shocked that we're not and I'm not saying that we're going to be, but once again, it puts pressure on the possibility of doing so. So once again, I'm saying to all of you,
00:22:22
Suze: please live below your means. But within your needs,
00:22:27
Suze: if you want something, but you don't need it and you don't have an 8 to 12 month fund that can carry you in case you lose your job in case you get sick, don't buy it. Think twice about if you're gonna take a vacation and you have to put it on a credit card. Don't mind if you put it on a credit card, as long as you could pay that credit card off when that bill comes in.
00:22:54
Suze: I just want you to start thinking like that because here we go again on the Feds, Mary go round. All right, everybody until Thursday when we have another ask Suzie and KT anything. There's really only one thing I want you to say every single day. And it is this today, wherever we go, everybody,
00:23:21
Suze: we will create a more peaceful,
00:23:25
Suze: joyful and loving world. And if you say that every day, I promise you, you will be unstoppable.
00:23:40
Music: Music (out).
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