Podcast Episode - Ask KT & Suze Anything


IRS, Must Have Documents, Roth, Roth IRA, Taxes


February 10, 2022

Listen to Podcast Episode:

On this podcast of Ask KT & Suze Anything, Suze does a follow-up the the last episode and answers questions about Roths and the Five Year Rule.


Podcast Transcript:

February 10, 2022. And this is Ask KT and Suze Anything, anything you ask, we will try to answer by the way. If you want us to answer your questions, all you have to do is either send in an email your question to AskSuzePodcast@gmail.com or you can ask it on the app, the Women & Money app. Just that simple. All right, KT, so welcome back. I'm a little sleepy this morning. You have bags under your eyes. I know I really worked hard since Sunday. Should I tell everyone why? Yes, we caught five huge Wahoo. And when I say five huge Wahoo, that's quite a few 100 pounds of fish, which we then harvest very carefully using every last bit of that fish, including the Wahoo belly, which you don't eat. But I use that for bait. We use the head and the bones for soup. We use the ribs for barbecue. And of course, the meat itself can be cooked millions of different ways. Yeah. What's so funny everybody is that um if you do go to the Women & Money app, that is where you will see Colo holding one of the Wahoos that they caught last Sunday. When KT was supposed to be here, they caught three that day. They caught one on Monday or Tuesday and they caught two on Wednesday and the two they caught on Wednesday are huge. So, what happens is when the boat comes in, the Islanders wait for us to go to the fishing station cleaning station because they know that they get the heads. They get the bones. They don't even want the meat. They want the bones and the head to make soup and ribs. So funny. I'll send a picture of Suze next to the big ones that we just caught because it's pretty extraordinary. We'll put it in the app. Yeah but they're that they're as big as the ones they caught yesterday are as big as Colo. It's really something all right. However, this isn't a fishing show. Although that does remind me a few months ago. I think it was two months ago when I had my voice. Anyway, I did an interview with William Shatner and it's on video. In fact, it's on portable tv. It's his new show. That's a that's called I Don't Understand. And we were supposed to be talking about money and all of a sudden it goes into Wahoo just like this did. So you can look at that, and so if you want, it’s a great show, it just came out the other day you can go to the Women & Money app and I have the direct link for it right there on my wall or go to portable tv and search. I don't understand or just do that on the you know on google under William Shatner, I Don't Understand. I think you'll find it enjoyable. All right, KT, what are we doing today. Today is gonna be actually today is a collection of so many questions that came in after your very popular Sunday, February 6, Suze school about Roth. So, the first question I have is from Rachel. Actually It was about the five-year rule and how it pertains to Roth because I got news for you. Good luck finding a financial advisor who even understands that. But anyway, go on. Okay, so we can start. Wait all of these questions pertain? Pretty much. So, this is like our, this is like our follow up to Sunday, is that right? Absolutely. Okay, so let's see if we can Roth and roll. We have quite a few. Did you just hear I made a joke? Did you hear it Roth and roll? Yeah. We're gonna roll through these. Roth and roll or rock and roll. Roth and roll. Why would we rock and roll? And we're talking about Roth? All right. First one is from Rachel. Hi Suze and KT. I have had two different employers in the past which I have contributed to 403b’s through those employers. Whenever I left a job, I did not touch the retirement accounts. Smart. Now I'm 38 years old and got married last year are combined adjusted gross income is over the threshold for us to contribute to the Roth IRA. Suze. Should I be trying to open a backdoor Roth and if so, I'm confused about whether I'm supposed to move my traditional 403b account into that Roth. All right, my dear Rachel, so many things here. If I were you, this is what I would be doing right here. And right now, I would be transferring all the money that you have in your 403b at your ex employers. You have two of them and I would be rolling them over two a custodian at a discount brokerage firm. So, you go directly from your ex employers to the new firm. You're going to have your Roth IRAs eventually with it would be a traditional IRA that you're rolling it over to so that you don't have any tax consequences because you've never paid taxes on that 403b so, when you roll it over to an IRA rollover, there are no tax consequences. Then little by little because you're so young, You're 38 years of age. You then convert little by little into a Roth IRA. And that's how you get the money. That's in your taxable 403b's into a Roth IRA because there is no income limitation on conversions. So that is what I want you to do. Forget the backdoor Roth because if you have a backdoor Roth then it gets very complicated. You know, you need to listen to some of the past podcasts that I did on the Pro Rata Rule of when you have traditional IRAs and now you want to do a backdoor Roth. Be very very careful because your backdoor Roth is going to be taxed more than you have any idea. So, make your life simple. Don't open up a backdoor Roth and start transferring your traditional 403b's to an IRA rollover and from the IRA rollover at a brokerage firm to converting to a Roth IRA. Remember you will owe taxes on any money that you convert. Okay Suze. So, I'm going to fire away with six questions. I told you we were gonna Roth and roll. Oh gosh, Roth and roll. So, first question Suze is from Simoni. Um why do you not recommend contributing large amounts from traditional IRAs to a Roth? I am within five years from retirement at age 62 and I want to convert 50,000 annually before I start taking Social Security at 70. There you go. Answering that one. Suze. Yeah so, I'm a little confused because I don't know if you are 62 and you are retired and you're not gonna have any income until you want to start collecting Social Security. So, I'm not exactly sure of those things. But here's just let me give you a general idea why if you want to convert money from a traditional IRA to a Roth IRA. And now you're in your 60s, your late 60s you're about to take Social Security and you're doing that because you don't want your Social Security taxed. That doesn't make any sense. And it doesn't make any sense because of the amount of taxes that you are going to pay when you convert from a traditional to a Roth, so you don't really have time to make up for that tax loss. So, you're paying more in taxes that way than you would on your Social Security or even your increase on your Medicare B premiums. So, if you convert $50,000 annually, annually, that's going to put you in a high-income tax bracket. So, don't do it. It's not worth it. Now if you were 35 years of age you had years left, you weren't having any income coming in anymore. You were unemployed. All right. You want to transfer 25,000 a year and maybe that's all your income. Okay, but not 50,000 a year and you’re possibly working, and it's no don't do it. That's why. Okay, so Suze. Second question does the same five-year rule apply to a converted Roth after death. The account was opened five years before death, but the last conversion was done in the year of death, will the beneficiaries have to wait five years to withdraw earnings tax free? So, here's the thing. Remember I told all of you on Sunday that every time money is converted from a traditional retirement account to a Roth, a new five-year tax holding starts. So, if one was done a year before death, that is when that clock started. So yes, it has to be five tax years from that conversion before they can take out the earnings tax free. Okay, next um this is also from the app Suze, this is from Brooks and the first thing that they're saying to you is best Suze's school ever, February 6th. Everyone. Listen up question. What about RMDs associated with a Roth 401K. Should we always transfer it to the Roth IRA to avoid RMDs. Tell everybody what RMDs are. Okay, everyone required minimum distribution. Alright, alright. So, the answer to that is yes. Alright, that's a short question and a really great answer. But anyway, here's the reason why, any money that you have in a Roth 401K is subject to required minimum distributions, which means you have to start withdrawing that money once you turn 72 years of age in a Roth IRA, RMDs do not apply. So if you're in a situation where you don't need to take money out at all to live on and you would like to leave more tax free to your beneficiaries, why not convert it from a Roth 401K to a Roth IRA, no taxes there. The key is this, make sure that you have started a Roth IRA on its own because when you convert a Roth 401K to a brand-new Roth IRA that you just started, and you don't have any other Roth’s the five-year tax holding starts all over again. If you had a contributory Roth that you opened up, let's say five years before, you put $100 in it, you never touched it again, and now you convert your 401K ROTH to VAT Roth IRA or any Roth IRA, the five year rule has already been met. So just know the time clock and a Roth 401K does not transfer with you to a Roth IRA. But if you have a Roth IRA already, the time clock has been ticking. Next question is from. Did I just confuse you on that? No, but um, I think the easier way to say it is, there's only a five-year rule time clock on a Roth, right? I guess so, whatever. Listen everybody, if there's something you don't understand, you can write to KT on the app and I'll try to help you out. Okay, next question. I just have to say something here every once in a while, you know, we're answering other questions that come in from other places as well from other things that we do besides this and KT is reading some of the questions and then KT starts to answer them. Wait, let's tell them, every time Suze did speaking engagements, I would, I would stand there and I would look like, you know, I work with Suze, I'm part of the team, everyone would come backstage to me and say so, KT, when Suze told us to do this, what do you recommend? And I would start to answer them if I could, Suze would get so mad at me, KT, you're not to give financial advice but they thought because we work together, live together, love together, have been together forever that I know as much as her. Okay, next question is from Melanie when you refer to converting a Roth 401K to a Roth, are you referring to the Roth IRA? If so, what about the original limits? 6,000, 7,000. So sweet. You know what I love about these questions and really about all of you is that you finally have a place that you can come too and ask questions no matter what they are and you'll never be judged for it or embarrassed or anything and they're really so sweet, they're sweet. Like this one, Melanie is absolutely so sweet because it just is because you know it's just, it's just honest. Anyway, I love that, and I love that about the Women & Money Podcast. What you need to understand is that for a contributory Roth, money that you intend to put in every year after taxes for it to grow that has the 6 or $7,000 annual limit depending on your age. When you convert money from a traditional 401K to a Roth IRA remember you are going to pay taxes on any amount that you convert but there is no limitation on any level of the amount that you can convert. You wanted to convert $100,000. You could. If you wanted to convert a million or $2 million dollars you could, currently they're trying to get rid of that just so you know but there's no limit on your conversions and even though it would go into the same account that you have a contributory Roth because you don't need all these Roths, you just need one, the government, the IRS keeps track of how much of that money and that one account was from contributions in your contributory Roth. How much was a conversion? How much was a backdoor? Whatever it is. So yeah that's how it works. So, the two of them are very very different now KT, you know what you're supposed to say there, I have an easier way to say it, you know, an easier way to say it. No, you just said it perfectly. No, an easier way to say it is contributions on a contributory Roth are six or 7,000 a year. There are no limits on a converted Roth, and you can combine them all and doesn't matter. See I did that really fast, that was great, that was like 20 seconds, first is two minutes, KT doesn't like when I go on and on. So, Suze This next question sounds like it's about her, but she said I have a friend that makes more than 10,000 per year and files separately from her husband. So that's technically KT known as married finely and separately. Okay. Because of this, she cannot contribute to a Roth. But can she contribute to a backdoor Roth to get around this? No. Okay. That's a good answer. I love that answer. No. And the reason is. No. No really? The reason is whenever you're married finely separately versus married, finely jointly and you live in the same house with that person. All right. You cannot open up a traditional IRA or a Roth IRA if you make over $10,000 a year, which you do so no, you can't. But if you don't live under the same roof. If like Colo who now is married, since Ani really does live in Colombia, they don't live together if they filed married finely separately. And if Colo made over 10,000 a year, which he does, he could still then qualify for a Roth contribution. Suze next question is from Ann. Hi Suze and KT. That’s our mommy’s names. Yeah, mine too. I know. I've been in the military for eight years. All right. What do we want to say to her? Congratulations and thank you. Thanks for your service Ann. Tell her the only thing I collect. Yeah. The only collection that Suze has that means anything to her or her military coins. I think she has more than most presidents of the United States. To tell you the truth. I know you do amazing number of coins from all of her military visits and friends. So, I've been in the military for eight years. I have a Roth TSP with about $17,000 and a Roth IRA that I rolled over from a previous employer with about $4,600. I also have a 12-month emergency fund. Yeah, yeah, yeah, yeah, yeah. Is it that Alliant? Oh, it should be. And open it, make sure you get the Ultimate Opportunity, Savings Account at Alliant. Okay. I don't have any debt besides my mortgage by living within my means. I have a surplus of about $1,000 a month. I'd like to put it to good use. There is where she should open the account. I was trying to decide whether I should put it in my Roth TSP, my Roth IRA or maybe somewhere else. What do you think by the way I'm 38? Good for you. Yeah, At 38. I would first make sure really and that you max out your Roth IRA. You know, hopefully you're in the military, you have a Roth TSP. They match your contribution up to a certain amount. But after that amount I would like to see you max out your Roth IRA because hands down a Roth IRA is far more beneficial than a Roth TSP or Roth 401K or Roth 403b. And the reason is they're governed by different rules and a Roth IRA remember you can take out your original contributions anytime you want without taxes or penalties regardless of how old you are or how long that account has been opened. So, a Roth IRA is fabulous over a Roth 403b after the point of the match. If you don't have a series I bond, I really love series I bonds right now. So, it's something that you might want to look into by going to TreasuryDirect.gov and check them out there or past podcasts where I talk about that. At 38 if you already have all these emerged, you know, you have your emergency fund and everything. I really want to see your money growing more than anything else. So, you know how, if you happen to be in the army, they call it be army strong, that's your motto. I want you to be financially strong. And the way I would want you to do that is by investing, especially given that these markets are kind of down here right now and I don't have a problem starting to invest here on any level. I think things are starting to change. I think all the commotion is out and so I'm feeling better about it. So, Roth IRA to invest, possibly a Series I bond, you know, or start your own investment account on your own and invest outside of retirement account. If you're totally maxed out. How's my voice sounds a little bit better Suze. But let's tell everybody the great news, we're gonna spread the love on Valentine's Day. I'm taking Suze to a really great specialist who's going to look at her and make a decision whether or not she should have a little procedure to help with that voice. Everybody's and we'll let you know, we'll let you know. So maybe I won't be doing podcast for a little, but you never know here. All right, but I'm gonna fix it. Maybe I should do it for you. I can read and answer. Suze. They would be the most entertaining podcast we've ever done in our life. And you do that for everybody if you all want KT to take over one or two of Suze's podcast write in, tell me your thoughts, thumbs up or thumbs down and we'll make a big decision. Oh my God. Here we go. Alright, where's my quizzies? So KT since you were not present for last Sunday’s podcast because you were fishing. I listened to it. You listened to it a few times with me? Right, so, so, um somebody wrote in, Patty, and she has three questions. So, I'm giving you a triple header quizzie which means hopefully you can hit it out of the ballpark and remember KTs quizzies, are for all of you. So, Patty says I did a conversion from my 401K to an individual Roth IRA last year before December 31st, 2020 and paid the taxes in 2020. My question is related to the five-year rule on conversions. Okay, so she converted money from a 401K to a Roth IRA, when will that $25,000 conversion amount be available for me to withdraw. Now. She is 57 years of age. You should all know that. So, I'm into saying write down these things, write down that she's 57. Right? That she converted $25,000 from a 401K. That was taxable to a Roth IRA which makes it a converted Roth. Write down that she did this in 2020. Okay and she paid taxes in 2020, KT, when will that $25,000 conversion amount be available for Patty to withdraw penalty free. Now can she withdraw it when she turns 59 a half or can she withdraw it January of 2025. Think about it. Let everybody think about it for a second. You think about it, KT, I can tell she's thinking about it because she's giving me this look like and grabbing the piece of paper from me. I think 2024 would have been five tax years. How did you get that? Well she opened it in 20 right, converted in 20, so that's when the five-year rule starts that year, from January to December 31, 2020. So even if she converted, let's say December 31st 2020,of 2020. The tax year begins when KT, January. January 1st of 2020. Mm hmm. Now KT, why did you say January 1, 2024? How did you get there? Because she opened her account in the year 2020 and that year counts as her first year. When in that year does it count as her first year, January 1st through till December 31, but it starts at January one. So, January 1, 2020 is her first Year. So now how did you get 2024 explain it to everybody? You just counted. So, 2020 is year one. 2021 is year two. 2022 is year three. 2023 is year four. And 2024 is year five. I was doing it on my fingers. Yeah, but they can't see you counting on your fingers. But you can all do that yourself. On your fingers. Just count your thumb is the first. That's alright. Alright. Anyway, anyway, when will the earnings on that converted $25,000 and be available to me tax and penalty free? The earnings, She's only 57. 59 and a half. So, she has to be 59 and a half. Right. So, if right now she's 57 years of age and we're in 2022. All right. And 20, I think she could have it this year. No, no, no wait, she's 57 now and we're in 2022. Hold on. She can have it in um 2025. No, she can happen 2024. Alright, because she can have it in June 2024. Right. So, well you don't know when she's going to be 59 and a half exactly. So here are the rules everybody. Again. Her Roth converted account has got to be open for five tax years. That will be January 1, 2024. She's currently. 2022. She's currently 57 for her to be able to take out her earnings. She has to be at least 59 and a half years of age. And the account has got to be open for five tax years. So, for her to avoid the penalty as well as income tax on her earnings, she has to be 59 and a half years of age. And that account has got to be open for at least five tax years. Again, she can take out the original amount she converted because she paid taxes on it after those five tax years, but that's 2024 but will she be 59 a half by 2024 maybe yes, maybe no. So, but chances are in 2024 is when you'll be able to do it. So, Ding Ding Ding. Last one KT, should these conversions. So, all these accounts that she's converting because she wants to do more of this, should they be held in separate Roth IRA accounts, it looks like all one account on her statement. Let's say she converted in 2020. So, she has this one account and now let's say in 2022 she wants to convert another amount, Maybe in 2023, another amount. And now she has all these different accounts, or she opens up a contributory Roth where she contributes to it every single year to each one of those accounts need to be separated so that the time limits. No. And why is that? I'm not quite sure I remember correctly, but it's a no, you can keep everything in that same Roth. Why? Because that started the year, she opened at 2020 starts the five year rule. No, No, it has nothing to do with the five-year rule, I'm not sure, you know, but you got it right. It's definitely a no, but I can't quite remember why. I think, want to hear my reason why bother opening all these separate accounts. Well what if by law, you had to, nope, you don't have to, who keeps track of the time of you can take out your Roth IRA So are you saying to me that the IRS if you put all your Roth all they know, so they know they keep track of it and so they'll know when you're taking money out from a converted Roth versus a contributory Roth. Yeah, they know it's all written debt. They have all that information. So Ding ding, ding, ding, ding, big brother baby, or big sister, one of two, whatever it is correct. So here's what you all need to understand when you put money into a Roth IRA, you only need one Roth IRA at one account, you can have a contributory Roth that you start, then you can take your traditional account if you want and convert it to a Roth. You can have a 401K Roth and convert it, you can have a traditional Roth and convert it, you can do a backdoor Roth and put it all in that one account. Even though most of those Roth’s are governed by different rules, the IRS keeps tabs and there's a withdrawal mechanism that they used called first in first out. So, when you withdraw money from that one Roth, what are you laughing about? That's such a silly name. I never heard that before. First in first out? That's like me at a party. Yeah first in last out. So, they have they have FIFO and they have LIFO. LIFO is last in first out. Are you serious? Are you kidding me? Oh my God, IRS needs a makeover LIFO and FIFO? Oh is that true? Suze are you sure? The head of the IRS had two little doggies’ LIFO. We're going to get people so confused. Is it real? Yes. KT, you can't make me laugh. I'm sorry. Don't make me laugh. Alright I promise. I can't breathe, then I got problems. Anyway LIFO, and FIFO. Here she goes again. Nope, I'm not gonna, I'm not gonna say anything. I can't believe it. Right so FIFO stands for first in first out. It's an accounting method. LIFO stands for last in first out. So, when you take withdrawals from your Roth the first thing, they look for is contributions. Did you make any after tax contributions into that account directly as a contributory Roth? Were those the first in out of all the other things that are in there. So they look at it and first comes out your contributions then comes out all the money that you converted and after you've taken out those two because you've already paid taxes on those two then they look at earnings. So, what happens is, it's all in one account. The IRS keeps track and they keep track by that method. Your face. What? I just can't believe that that's the terminal KT. There's all kinds of terminology and finance that are just as ridiculous. Just so you know. All right everybody once again I think we've gone a little bit long but that's okay who else would you want to spend your Thursday morning with whenever you're listening to this other than KT, Suze. No. KT, Suze. KT and whatever. And also, all right now Sunday, you know what Sunday is KT? Suze school, Suze Super Bowl. Are you going to do a Super Bowl podcast? Oh boy what am I gonna do? Touchdown, baby. Talk about financial touchdowns. Really? Oh God, here we go. Let's do financial touchdowns. Let's do that means me. Okay. Suze do financial touchdowns. I think that would be a great Sunday Super Bowl Suze school. Okay, everybody touchdown. Alright. Anyway, Okay, so a few things before we saw right, I'll come in and do a Suze School halftime. That's very funny KT. I will. Alright, Colo will join me, Lynn and Tom will join me. We'll get the party going. Lynn and Tom, KT's twin sister and her husband arrived today. They haven't been on the island and God knows how long and its Tom's birthday on the 11th. So, we're going to celebrate with him, and all watch Super Bowl together. Alright, but are you gonna let me sign off or not? Alright. Two things I want you to remember number one find William Shatner, I Don't Understand, right? And um and do that because it was a really fun thing that I did a few months ago when I had my voice and please remember that there's only like two or three weeks left for all of you to get the Must Have Documents for $69 after that. They are going up in March 2, $99. And if you just go to SuzeOrman.com/offer, you'll see it there. So just look around some of you are a little confused. Say no, no, it's not there, it's they're charging you me more. They're not. It's $69 period for you. All right, So until next Sunday. Wait until Super Bowl. Super Bowl Sunday. What do we want for everybody? KT. It's the S it's all the S words. We want to be safe. We want to be strong; we want to be secure and we want a touchdown. Suze touchdown. Should we tell them who we're rooting for? Oh, she doesn't want us to get political. Not. We are all about Super Bowl whoever wins deserves that big old ring. Suze almost got one. I never got a Super Bowl ring. I almost got an NBA ring. An NBA ring. You almost got one. Yeah, we'll have to wait and tell that story in March during March Madness. Alright, tune in every Alright, everybody Cincinnati Bengals go for it. Bye bye.


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