401k, Family, Financial Planning, IRA, Mortgage Rates, Retirement, Roth, Taxes
December 08, 2019
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In this podcast, Suze shares three recent conversations she’s had with friends and family about their finances.
It's the week after Thanksgiving of 2019 and our Thanksgiving was going so, so great. We were all having the best time. I was catching fish, the kids were swimming, everybody was just loving it. And then it came the day that they were supposed to leave, and it's on that day that everybody all of the sudden asks me financial questions. And I'm sitting down with my brother-in-law, who I love so much. And I come to find out that just two or three months ago, he refinanced his home and I said to him, why? Why didn't you ask me before you did that? And he just looks at me with this blank stare. I said, Why? Why would you refinance your home? Tell me that you refinanced your home from maybe the 23 years that you had left on this mortgage to a 20-year mortgage? No, Suze, I redid it to a 30-year mortgage. I'm like, are you kidding me? You refinanced to a 30-year mortgage and then so proud of himself, he says, but Suze, I'm paying an extra $1000 a month towards that mortgage payment to get it paid off. And so then I say, well, if you're paying an extra $1000 a month towards it, why didn't you do a 20-year or a 15-year refinance, which would have been .5% cheaper than a 30-year? And he just looks at me like, what?Do you know? Do you have any idea how aggravated I get when my own family makes financial moves that are just plain stupid? And they're stupid, especially since all they would have to do is pick up the phone and call me. I was just with him a week or two ago, he could have told me. I mean, wouldn't you like to be able to just pick up the phone and call me and ask me, should I do this? Shouldn't I do that? What do you think about this? What do you think about that? Wouldn't you just love to do that? And my own family, time and time again, they don't takeany opportunity to call up Aunt Suze, or sister-in-law Suze, or whatever it may be, and simply ask me a question before they do something with their money.Now, I can't explain why I sit here and I think to myself, and I said this to him, what have I done to you that made it so that you can't come to me and ask me? Have I made you feel like I'm just inaccessible to you? What have I done to you? And he just looks at me. Is it because he's a man? Sorry, men, I know this is the Women and Money podcast, and the men smart enough to listen. But my own brother-in-law is not smart enough to listen, not smart enough to ask. And I have to tell you, I'm angry about that. I'm angry about it because what a waste of money. And we live in a time and a place that you cannot waste one penny. So today's podcast, once again, is can you just do nothing versus something you do not understand? Can you put your pride away and again, I did a podcast on this just a little bit ago about pride because maybe it was his pride. He wanted to think that he knew, so he just did, but he didn't. So is it your pride that's getting in your way? I don't know what gets in your way,but you do not have the time and the opportunities anymore, as we used to years ago, where you can waste one moment of your time because it is your time that you spend working for your money. And if you are wasting your time, you are wasting money.Then I start talking to somebody who works for CNBC and these are finance people, OK, finance people. And it turns out that General Electric is offering many of the employees a buyout. You can get your pension and you can start at the age of 60, or you can get a lump sum of money out of the pension and put that money in an IRA rollover. And one by one, they are taking the money and putting it in an IRA rollover. And I'm sitting there going no, don't do that, especially if you are in your mid-50s or whatever. Listen, I understand if you're in your 30s or your 40s and you have a lot of time to make the money grow, probably the best thing to do. But many of these people are 54, 56, they're just a few years away from being 60 when the pension would start, and there is no way to generate enough income from the payout, the lump sum that they would receive, to generate the pension. For instance, I just have to go through this with all of you. This one person is 56 years of age. In four years, they would get $1300 a month for the rest of their lives. They are not married, they have no children. They were offered a buyout of $135,000 and every single person that he went to at CNBC said, take the lump sum, do not take the pension. And thank God he was not stupid enough to listen and he came to me and over and over again, I showed him how there is no way possible to ever get that $135,000 to grow enough in four years to generate $1300 a month to him, guaranteed. It would have to go to at least $500,000 if he didn't want to touch any of the principal. And he kept saying, but Suze, everybody here they're taking the lump sum. How could they all be wrong? Well, the same way my brother-in-law was wrong. But depending on the situation, depending on their age, if they're in their 50s, I have to tell you, they're all just wrong. So now I'm getting even madder. I'm getting madder because here are finance people that are supposed to know and they're all looking at one another. And then it turns out that 30 of them all gathered together and made this decision and they all went to some financial advisor, and they're going to do the lump sum, all people that are older and that should have taken the pension in most cases. Obviously, there are exceptions, so it is really important.The next point that I want to make on this podcast is just because everybody else is doing something doesn't mean that it is right for you. Because it wasn't right for this person, this man who came to me and thank God he came to me, it was the worst thing he ever could have done. But he was almost going to do it because why? Thirty of his co-workers were doing it. It is so important when it comes to your money that you honor yourself, you respect yourself, you understand what you need to do for you, regardless of what your co-workers are doing.Next, somebody comes to me and they say, you know Suze Orman, I have heard you say over and over again that you should do a Roth 401k or a Roth IRA rather than a traditional one and get the tax write off for it.So he comes to me and he says, you're wrong, Suze Orman. I go, and why is that? He said I make $85,000 a year, so that puts me in the 24% income tax bracket. If I were to fund my traditional IRA with $6000 that would save me $1440 on my income tax in the 24% income tax bracket. If I put that $1440 into a Roth IRA and I let it grow for 43 years until I was 65 years of age, that $1440 would grow to $11,735. And he said well then, Suze, the $6000 that I put into my traditional IRA is going to grow to $48,898. And if I took that out all in one lump sum and now I paid 24% income tax on it, that's equal to the $11,735 that I have in my Roth IRA that I can pay it off. Now, I don't know if you followed all that or not, but I'm looking at him like, are you kidding me?I said first of all, can we just talk about how tax brackets really work? Because I'm sure he's not the only one who doesn't understand this. Let's just say you made $85,000 a year. In the United States of America, we have what's called marginal tax brackets. It's not where you pay a straight percentage on 100% of your money. Currently, there are seven tax brackets: 10%, 12%, 22%, 24%, 32%, 35%, and the highest being 37%. Got that? But that does not mean once you reach a specific sum of income that you are paying that percentage on 100% of your income. Let's take this man at $85,000. He falls in a marginal tax bracket where if you make over $84,201 a year, which he does, you will pay $14,382.50 of income tax on that $84,201. Everything above that all the way to $160,725 he pays 24%. He is not paying 24% on all $85,000, so in his case, he would be paying $14,574.26 which makes it that he's only paying 17.14% income tax. So, if you're going to be figuring things out, you have to know how to figure things out. And why am I telling you all this? Because he then goes on to tell me so, Suze, I have told everybody and showed everybody these numbers and we're all going, yeah, we should do the traditional IRAs versus the Roth.Then I say to him, well, let me just tell you how much of an idiot you really are. You do understand that if you put $6000 this year into a traditional IRA, you cannot put your tax savings into a Roth IRA because you've already maxed out your IRA contribution, whether it's a Roth or a traditional. And he looks at me and he goes, oh. So I said, therefore, what are you going to do with those tax savings that are going to allow you to get tax free income forever with it? Plus, it's not $1440 of tax savings, it's $1028. And are you really going to invest that $1028, really? Or you just going to waste the money? And again he just looks at me and I said, here's the other thing. When you get older and you withdraw money from a retirement account, you're not just going to pay tax on the amount of money that you withdrew at that tax bracket. That amount of money that you withdraw is going to be added to all your other income that you're getting, possibly your pension, your interest on your retirement accounts, possibly 85% of your social security or whatever it may be. So you cannot just look at it that way and again, he's just looking at me.Why am I so aggravated today? I am aggravated because when you don't fully understand the ramifications and how something works, you have to be very careful who you are getting your financial advice from. I don't know. I think the cost of the Women and Money podcast is absolutely one that you can afford, given that it's free. I think the fact that you have the ability to write in questions and chances are I may answer them directly, or at one point I'm going to get to your answer on the podcast is really great, but it really just makes me nuts that you're making mistakes simply because why? Do you want to be right, do you want to act like you know? Can't you just ask before you do something?So as we're coming to the end of this year, you are all going to have to next year file income taxes. And then the question becomes, do you do the standard deduction? Do you itemize? So it's important that you really know what you should do. Which one of those should you take? Do you even understand the difference between them? So I'm going to have to sooner or later here, do a podcast on the difference between standard deductions and itemize deductions because right now the standard deduction is really pretty generous, and the standard deduction means all of you get to deduct a certain amount of money from your income that you do not have to pay taxes on. So if you are single in the year 2019 your standard deduction is $12,200. If you are married finally jointly, it's $24,400.And by the way, I then said to this man who came to me, although he's really at the age of 22 only a boy, all right, that's beside the point. I said, with the $85,000 that you're earning, did you happen to take off the standard deduction? And he says, what is that, what do you mean? I said you just told me that your income is $85,000 but that's not what you're paying income tax on. And he looks at me and goes, oh. Are you all understanding what I'm saying here? Are you all getting it?So, a few things just to summarize. If you have a house and you've been paying on it a mortgage for five years, for seven years and you're thinking about refinancing, do not refinance for 30 years. If you want to refinance, OK, but you are only to refinance with a fixed-rate mortgage today, and you are only to refinance for a term that is equal to or less than what your current amount of years that you have left on your mortgage happens to be. And if you are going to be able to put extra money towards your mortgage, can you just simply try to get a 15-year mortgage where interest rates are .5% less than a 30-year mortgage? If you are putting money in a retirement account, can you just if you have the options to do so, use for new contributions, a Roth 401k, a Roth 403b, a Roth TSP, or a Roth IRA if you qualify? And when figuring out your taxes, can you just really understand what the income tax brackets are and how much you actually pay percentage-wise when your standard deductions or your itemized deductions are taken so that you get that you're not in that high of a tax bracket? Can you just do that?So it's just things to think about all right everybody? My brother-in-law, what am I gonna do with him?In providing answers, Suze Orman is not acting as a certified financial planner, advisor, a certified financial analyst, an economist, CPA, accountant or lawyer. Suze Orman does not make any recommendations as to any specific securities or investments. All content is for informational and general purposes only and does not constitute financial accounting or legal advice. You should consult your own tax, legal and financial advisors regarding your particular situation. Suze Orman does not accept any responsibility for any loss which may arise from accessing or reliance on the information in this podcast, and to the fullest extent permitted by law, we exclude all liability for loss or damages, direct or indirect, arising from the use of the information. To find the right Credit Union for you, visit https://www.mycreditunion.gov/.
Credit & Debt, Saving, Investing, Retirement