Podcast Episode - Suze School: The Biggest Mistakes You Make Are the Ones You Don't Know You’re Making

On this episode, Suze explains why you need to know the difference between an IRA rollover and a transfer, so you don’t make a mistake that will cost you a great deal of money.

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Podcast Transcript:

Suze: July 14th, 2024. Welcome everybody to the Women and Money podcast as well as everybody smart enough to listen. And today is Suze School. But before we do Suze School today, for those of you who wrote in and you want to know, how is KT doing? She's fine. She's waiting in the other room for us to go out fishing with Colo. So that means she's doing great. That's number one.

Number two: today is July 14th and it happens to be the birthday of my uncle Nady and my aunt Thelma, last name of Notkin for both of them. And that was both of their birthdays, and they had a love beyond the beyond. It was such a fabulous love, I can't even tell you — it’s one really that KT and I always wanted to have, because it was just so incredible. And obviously they died quite a while ago now, but I just want to wish them a very happy birthday up in heaven. And for all of you to know that maybe one of the greatest people and role models in my life — really even more than my mom and my dad — was my Aunt Thelma. Oh my God, I loved her, loved her, loved her. Oh, I loved her. And so Auntie Thelma, I will miss you also, forever and a day.

All right, and last but not least, I just want to talk a little bit about inflation. As you all know, a few days ago inflation was announced that it came down a little bit and it's now at 3%. And therefore it’s also being projected — who knows if it will happen or not — that maybe the Fed funds rate will come down starting in September. I don’t know. I don’t know if it will or not, but that’s beside the point. But what is happening, and you can see it happening, is that interest rates are starting to come down and you can see that in particular in mortgage rates. Mortgage rates now for a 30-year fixed rate mortgage are below 7%.

And the reason that they are coming down is that interest rates on mortgages are really dictated by the 10-year Treasury, not by the Fed funds rate, but by the 10-year Treasury. And because the 10-year Treasury rate is starting to come down, so are the interest rates on mortgages — just something for you to take note of. But also you need to take note of the interest rate decline on Treasuries, on certificates of deposit, on things like that.

So for those of you who still want to lock in a good interest rate — maybe you have money that you don’t want for the next 12 months or maybe the next almost 18 months — let’s just say that’s true, and you just want to lock in what will be probably the highest interest rate that you’re going to get anywhere during that time, I am telling you the interest rate for the 12-to-17-month-and-30-day, which makes it almost 18-month certificate of deposit at Alliant Credit Union, is something that you should be doing now. The rate is 5.05% APR for amounts under $75,000, and for $75,000 or above, it's 5.10% APR.

Now, you know and I know that interest rates from Alliant Credit Union — just like every other financial institution and Treasury out there — have been coming down little by little. And the last few times I told you, take a hold of it, because you never know when interest rates could come down again. Especially with Alliant Credit Union — it’s true, they did come down. I don’t know if they're going to be lowering their rates or not, but I sure wouldn’t wait and see. So if you want to take advantage of that interest rate right now, go to myalliant.com, click on where it says “Certificates,” and there you go. All right.

Now let me tell you why the topic of Suze School today is all about transfers versus IRA rollovers and why you have got to know the difference between those two. So this week I was talking to somebody — there were a lot of people on the island and they would see me and they would talk to me and things like that. One of the members — because you know I live on a private island and you have to be a member of it — one of their workers saw me and they were so excited to tell me something that they were so proud of. So I stopped to listen, and here is what this person told me.

He said to me, “Suze, last year I needed money. So I took out $25,000 from my traditional IRA, and I needed to pay it back within 60 days as you know. So I took it out and I did whatever I needed to do with it.” He did not tell me what he needed to do with it. “Sixty days were coming close and now before the 60 days were up — we’re now in 2024. So I took out $25,000 from a traditional IRA,” you might want to write this down, “at the end of 2023. And I needed to have that paid back within 60 days of whenever I took possession of that money.”

Now we’re in 2024 and he tells me, “Here we are, Suze, and the 60 days are almost up. So you want to know what I did? I didn’t have that $25,000 but I had another traditional IRA at a different brokerage firm.” So he had two traditional IRAs at two different brokerage firms. “And I took out that $25,000 from the other brokerage firm because now we’re in a new year, Suze. So now I can do another IRA rollover, and I put that money back into the IRA that the 60 days were almost up at.” Now, did that just make sense to all of you what he did?

Just to be clear — the end of last year, he took out $25,000 to do something with. Before 60 days were up, he had another IRA; he took out $25,000 from that IRA to put it in the first one to get it in there before the 60 days were up. And now the 60-day clock is running for his second one that he did in 2024. And so I said, “Now, what did you do?” He said, “Well by then I had the $25,000 to pay back the second IRA rollover that I did. So now everything’s great.”

He said, “Wasn’t I smart?” And I said, “I don’t quite think so.” And he looked at me and he said, “What are you talking about?” I said, “You are only allowed one IRA rollover where you literally take out money and then you put it back within the 60 days. You are only allowed one IRA rollover a year.” And he says to me, “I know, I did an IRA rollover in 2023 and then I did another one in 2024, so there’s one a year.” And I said, “It doesn’t work like that. It’s not a calendar year. It is 365 days from the time that you did your first IRA rollover. So you would not be able to do another IRA rollover until the end of 2024 when 365 days passed.”

And he just looked at me like, “What?” He said, “What does that mean?” I said, “I’ll tell you what that means to you. You went past the 60-day rule, so that $25,000 is going to be taxed to you most likely as ordinary income plus a 10% penalty. Plus now you’ve just really screwed everything up. So you better go see a CPA and figure out what you can do about this and the penalties now that are going to be.” So I said to him, “However, didn’t your CPA catch this?” And he said, “No, I do my own taxes and nobody said anything because I just did them.”

All right. So why am I telling you this story? I’m telling you this story because number one: the biggest mistakes you will ever make with your money are the mistakes you don’t even know that you are making. You need to know the difference between a rollover and a transfer because many of you are still totally confused between the two.

All right — what is a rollover? A rollover is when you literally, let’s say, have an IRA or a Roth IRA — doesn’t matter — and when you take money out of an IRA, you take it and you want to put it back within 60 days. That is known as a rollover. When you do that, you can only do that once every 365 days, period. So it is not in a calendar year — the date starts from the date that you took that money out. And even if you put it back within the 60 days, it’s 365 days for you to be able to do that again if you want, from the date that you originally took that money out. Period.

It’s for all your IRA accounts. If you do an IRA rollover in one account and you happen to have another account or a Roth IRA, it doesn’t matter — all the IRA accounts are counted as one account. That’s what a rollover is.

What is a transfer? A transfer is when you have money in an IRA, for instance, and you want to change the brokerage firm or the credit union or whatever that it’s at and you transfer it to a new brokerage firm or a credit union and it goes directly from custodian to custodian. You do not touch it whatsoever. A rollover, when we’re talking about IRAs, is when you actually take money out — it’s in your hands and you have 60 days to roll it over back into it. A transfer, you can do as many transfers as you want.

So I’m just doing IRAs right now, whether it’s a Roth or traditional. So you could, if you want, have five different brokerage firms that you have opened up a traditional or a Roth — hopefully it’s a Roth — and you want to transfer all five of those into your new Roth IRA. And let’s say they were all Roths — you could transfer every single one of those; you’re not limited to just one a year. You could do all five. You would just do a custodian-to-custodian transfer. What does that mean? That means that you go to the brokerage firm or credit union or wherever it is that you want the account to transfer into, you open up an account or maybe you already have one, and you have them simply contact the custodian of your other Roth IRAs or traditional IRAs and they do a custodian-to-custodian transfer. You can do 100 of those a year if you want. It’s only with an IRA rollover that you can do only one a year, and that year isn’t a calendar year — it’s 365 days from the day you got that money. Are we clear on that?

Let’s go to a 401(k). A lot of you have most of your money, truthfully, in your 401(k) — whether it’s a Roth or a traditional — your 403(b) or your TSP or an account like that. When you have money in a 401(k), now let’s just say you’re retiring and you want that money to go over to an IRA because it gives you more choice. That’s what you want to do with it — you don’t like the investment choices possibly in your 401(k), whatever it may be. When you take money and it goes from a 401(k) to an IRA, that is known as a rollover, and it will be either a direct rollover or an indirect rollover.

And when you do a rollover, whether it’s direct (which I’ll explain in a second) or indirect from a 401(k), 403(b), or TSP — whether it’s a Roth or not — that is considered a rollover. Those are not limited to once a year. Why is that? Because they are going from an employer plan to an IRA or a Roth. Just that simple.

What is a direct or indirect one? A direct one is where you go to your brokerage firm or credit union, you open up your IRA rollover account or your Roth IRA rollover account, and it will just be a regular account, but it will be for a rollover — from where? From your employer-sponsored plan. And they will contact your employer, and the money goes direct from your employer to your IRA rollover account. Just that simple.

Sometimes it can be an indirect rollover. What is that? An indirect rollover is when you instruct your company — for whatever reason, they don’t want to send it directly to your brokerage firm or credit union, they want to send it to you and they want you to put it yourself into the IRA rollover that you opened. That is called an indirect rollover, where they don’t directly send it to your IRA rollover account — they send it to you and you have 60 days to get it into your account. If they want to do that, it is necessary — mandatory — that you tell your employer that they have got to make your rollover check, however, your distribution check, made out to the name of whatever brokerage firm you’re doing the rollover with or credit union. That’s how it has to be. So when they send it to you, you’re not gonna cash it. What you’re going to do is you’re going to take it within that 60 days, give it to your brokerage firm or credit union, and therefore now you have done an indirect rollover and you are not limited to just once a year. No penalties, no taxes, nothing. That is how it has to be done.

Now, what’s important about this is that if, however, for whatever reason, you decide that you know what — you could use some of the money that’s in your employer account. So they’re now going to send it to you; they’re gonna make the check payable to you, and you think, “I have 60 days to get that money into my rollover account.” Better be careful, because if they send you a check made out to you, then there is mandatory tax withholding on that check of 20%.

So let me give you an example of this. Let’s just say you have $200,000 in your 401(k). Let’s just say it’s a traditional 401(k), and you figure out, well, why not have that money come directly to me? I’ll take that $200,000, I’ll deposit it in an interest-bearing account for 50 days, I’ll earn interest on it, and then I’ll take that $200,000 out and within the 60 days, put it in my IRA rollover. The problem with that is that if you do an indirect rollover and you have the company make the check payable to you directly, there is a mandatory 20% IRS withholding for tax. So your company is going to withhold $40,000 from that $200,000 for tax. So you are only going to get a check for $160,000. So you put that $160,000 in an interest-bearing account. All right, you make money, but you then, within the 60 days, are putting that into your IRA rollover account.

But the problem is the $40,000 that they withheld — you are going to owe taxes on that money and a possible 10% penalty if you are not 55 years of age or older in the year that you did that. And why is that? That is because you had $200,000 that was supposed to be rolled over; you only rolled over $160,000. So unless you come up with that $40,000 before the 60 days is up, you are going to owe absolutely ordinary income taxes on $40,000 if it was a traditional 401(k), plus a possible 10% penalty. So you are never, ever, ever to make that mistake of an indirect rollover from your 401(k), 403(b), or TSP where they make the check directly to you. If they won’t send it directly to your new brokerage firm or credit union or wherever you’re doing it, and they’re going to send it to you, you have got to make sure that they make it out to your new custodian. That is something that you need to know.

How many rollovers can you do from a 401(k), 403(b), or TSP in one year? As many as you want. It is not the same as an IRA rollover where you’re going from IRA to yourself back to an IRA, or from a Roth to yourself back to a Roth — it is very, very different. Do you understand that?

Now, the next thing is, let’s talk about conversions where you go from a traditional IRA to a Roth IRA — you are converting. You can convert as many times as you want in one year. Just that simple, because the money is doing a transfer. It is going from your traditional IRA directly to a Roth IRA — that’s a transfer — but you’re converting what you are converting: pre-tax money to after-tax money, and there is no limitation on that whatsoever.

Here’s the bottom line that you need to understand. You can do as many conversions a year as you want from an IRA to a Roth. You can do as many transfers a year as you want from an IRA at one firm directly to an IRA at another firm where you transfer it. You can do as many 401(k) IRA rollovers a year as you want. And remember, when it goes from an employer plan to an IRA, that is known as an IRA rollover. That’s what you need to know. And last but not least, in an IRA where you withdraw the money and you have 60 days to replace what you withdrew, you can only do that once in a 365-day period of time — and you can only do it in one account.

So that’s what the Suze School was all about. Now, I hope that made it clear. I just want to say something. Everybody, tonight is one of the biggest nights in our household, and let me tell you why. As you know, Colo — our kind of adopted son, aren’t you, Colo? Aren’t we both so lucky? Anyway, he’s from Colombia, and tonight Colombia is in the soccer championship against Argentina. This is a big deal, everybody. I am telling you, it is a big, big deal in this household. So we are rooting for Colombia; we hope they win tonight, and I can’t wait to see what happens. But until Thursday, when Miss Travis joins us again, there’s really only one thing that I want you to remember when it comes to your money — and it is people first, then money, then things. Now you stay safe, and if you do that you will stay unstoppable.