401k, Emergency Fund, Home Equity Line Of Credit, Home Mortgage, Retirement, Roth IRA
March 24, 2022
Listen to Podcast Episode:
On this podcast of Ask KT & Suze Anything, Suze answers questions from listeners about loaning money to friends and relatives, paying for college, a special “Can I Afford It” quizzie and much more.
March 24, 2022. Hi Suze. Hi KT, good morning. Hi, Good morning. How did you sleep last night? Well, pretty good given the fact that we are on the island, how excited are you? I love that we're in a place of great peace during this world of turmoil right now, which I know you want to talk to everyone about. I do, but not in detail today. First of all, welcome everybody to Ask KT & Suze, we switched there for you, Anything. And so, to get us back on schedule where Sunday’s are Suze's School. We're going to stick to another Ask Suze & KT Anything today because it is Thursday. However, these markets are very interesting. So, there's reasons that things are happening, and we will talk about that on Sunday. But for now, Miss Travis. You all missed me. Right, you were just with them. No, they missed me. They didn't miss you. They did miss me. Jesus, all right go ahead. Come on. Okay. Ready. First question Suze is from Kristen. Good afternoon, KT and Suze. I hope you are recovering well from your procedure. How would you say in my recovery? She's doing great. That's why we're back on the island. She saw her doctor who did a fabulous job and he gave her a big double thumbs up green light and said you are good to go miss Suze and I told her to put her head underwater because the saltwater is really great for the sinuses and he did say it will take another two months. So, we'll see what happens here. But her voice is coming back nicely. So, hope you're recovering well from your procedure. I've been following your advice for years. I love the podcast, your books and here's my situation. I cosigned a loan for my brother. Stop. Did this woman just say she's been following my advice for years? Wait, let me finish her sentence. She wrote. I know, terrible idea in retrospect. In retrospect girlfriend. How long have I been telling you? 20, 30 years. The biggest mistake you can ever make is cosigning a loan for somebody. Are you kidding me? You haven't been listening to me. I don't know who you've been listening to, but it hasn't been me. Alright go on. She said. I'm aggravated now. You're going to get more aggravated. I've been paying for the last year so I'm already out almost $7,000. I already stopped paying at one point and my credit dropped over 100 points. I'm finally back in the upper seven hundreds. The vehicle I guess she did a car loan said the vehicle has been wrecked. So, so my options are to sell back to the dealership for another 7,000 loss or stop paying and have my credit destroyed. I don't want to deplete my emergency fund. Should I take a loan against my 401K or let my credit take another huge hit. On a side note. I have a 14-year-old car and my credit won't likely recover before I need to purchase another vehicle. Thanks for the great advice Suze, Kristen. Alright, you already gave her a slap down. Tell her what she needs to do. I know Suze is looking at me like so aggravated. Well I'm aggravated because, and I'm going to restate it just in case you haven't heard me say this before. one of the biggest mistakes you will ever make is to cosign a loan for anybody if the financial institution is not willing to give somebody a loan, nor should you be. And the reason is very simple. Number one, if they don't pay, it doesn't hurt them. It hurts you. It ruins your credit and you legally and financially are responsible for that loan and you don't even know if they've been paying the loan on time. So, if you're ever foolish enough seriously to cosign a loan for somebody, they should pay you and you pay the loan because otherwise chances are, they're going to say, yeah, I'm paying it. Everything's okay and it's not, here is the problem. You are between a rock and a hard place honest to God Kristen but here's what I would do first. If I were you believe it or not, I would go out and even though I know cars are more expensive right now, I think they're probably going to stay more expensive for a while. I would go out and why your credit is still in the seven hundred. I would buy a new car or a used car or whatever you're going to do for yourself so that at least you have that under your belt. And that problem then has been taken care of. Then you're going to have to decide, listen if you don't want to deplete your emergency account or your savings account and you just stop paying. They always have the ability to come after you. But the car has been wrecked. So, I don't know exactly what they're going to get from you. They could go after you for that $7,000. So, I have to say in this, in this situation, you have to own up to the fact that you did something that you shouldn't have done and now you have to pay for it. And if your brother has any dignity or integrity about him whatsoever, you should arrange a payment. I don't care if it's $100 a month and he have to pay you $100 a month until $14,000 has been repaid to you, but you have to do something there. Otherwise you're going to lose your relationship with him anyway. So, you have to stick up for yourself. But in this situation, since you have the money for it, I have to tell you, I would just negotiate with them, pay it and then it's over and then you start all over again. But get yourself a new car first or a new use car before you do anything because you never know when something can happen to your credit score. Even though you paid it off. All right now, she knows how she's going to learn a big lesson from that. She learned a big lesson. But want to know the big loss here, KT, her brother. The relationship between and her and her brother will never, ever, ever be the same unless he pays her back and says, I am so sorry. She shouldn't even have to ask him. He should just do it on his own. Little wimp. Alright go on. Okay. Next question is from Cathy, I have a mortgage with mass housing. My original loan amount was $167,000. I owe $160,000. My interest rate is 5.125%. That’s high. Well, that's the question here. I purchased my home in 2019 with a 30-year mortgage. I'm a single mom. I work as an administrative assistant. So, I don't earn a whole lot. Suze. What is the smartest move here for me to do? Should I refinance with a lower rate for another 30 years since I don't plan to stay in this home long enough to pay it off anyway. I don't think I could afford the payments if I did it for less than 30 years. Kathy. I said that because that's your name. KT Kathy and Travis KT. Alright, so, Kathy, you purchased this home like three years ago at an interest rate of 5.125% and three years ago. Truthfully interest rates were really pretty low and then they went really low. Like if you had refinanced just a little bit ago you could have gotten like a 2%, 2.5%, 3% but here you are at five and a quarter percent which really isn't a whole lot higher than what you're probably going to qualify for if you refinance it. Plus you will be adding another three years onto the mortgage in case you decide to stay because you only have 27 years left right now if you refinance it, that's for another 30 and you don't know if you're going to really stay there or not? Also, it costs money to refinance. So, there are closing costs. So, on $160,000 it could be a few $1,000. And how long will it take you to pay off those closing costs with the amount of money that you save every month. So, let's just say it saves you $100 a month and your closing costs are $3,000. That's going to take you 30 months. Just savings just to pay back that $3,000. And so is that even worth it because you might not stay there. So I have to tell you bottom line here, I would not be refinancing if I were you should she go to a credit union like Alliant to find out if she can get a better deal and she can go to and see if she can refinance. But I don't know. I just I can't imagine that somebody's going because interest rates are going up right now by the time I was, that was why she wrote to you. She said before they go up any further. Well, guess what? This was written on March 18. So Not long ago you picked a new one, KT. I did last week. Right? So, I just I don't know. I'm going to stick with what I said, if I were you, I wouldn't be refinancing here. You could look into it. But chances are you're going to stick with what you have. I don't want her to lose those three years. KT. Ok, Suze, this is from Gwen and I think Gwen, maybe in the same boat as our previous Kristen. You ready for this? Hi, Suze. I need your help to figure this out. I was thinking about taking a withdrawal of $100,000 from my 401K to loan to a close relative. Wait a minute. I'm getting aggravated. Did you pick these just to aggravate me. What? I was feeling good. You look great because you got a haircut right after I said a few days ago when we did our last Ask Suze & KT Anything last Sunday. I said you need a haircut. Miss Travis went on and got one and she looks so cute, I can't even stand it. Alright, ready? Listen to what Gwen's deal is so Suze. Here's the thing. She's 56. But the part that makes a big red flag for me, let alone what? I don't even know what you're going to say. Increments. It's going to be paid back to me in increments by the end of the year. Good luck. Then it continues to say, don't tell me there's more. Come on. Ready. Would I be able to reinvest the money? How do I reinvest the money without being charged taxes? Again, when I make withdrawals, Suze? This entire email is a mess. You just need to listen to me. Gwyneth, you are not to do this. You are not to do this. I don't care who this person is. I don't care if this person is your identical self-twin. I don't care. Right? But this is the most ridiculous thing. Maybe out of all the emails we have ever gotten, this is the most ridiculous. And let me tell you why. First of all, you said that you retired last year, which means hopefully You were 55 years of age or older in the year you retired. Now, what's good about that? Is that under rule 72 T by the IRS code. I'm going to impress you now, KT, you are allowed to withdraw money from a 401K plan without any penalties whatsoever as long as you retired or left service in the year that you were going to turn 55 or older. So, I'm assuming that that's correct. So, you absolutely could withdraw $100,000 from this 401K plan if you wanted to without the 10% penalty. But you are absolutely going to have $100,000 added to your income and you are going to pay ordinary income tax on that in addition to whatever else income that you may have because you have to have some income to be living on. It's probably going to put you in a lot higher income tax bracket. So, it's very possible you could lose $20-$30,000 of that just to taxes and they're going to pay you back what, what they should be paying you back is 130,000. If that's how much you paid in taxes. But that's just one thing. All right now you've taken this money, you've given it to this person, this person gets sick, this person is in a car accident. Something happens to this person. Do they have a life insurance policy on themselves? So, if they were to die, you would get the money that way. Are you that wealthy? Really? That you could lose 100,000 plus taxes and it's not going to affect you and you are 56 and you're already retired. Are you kidding me? And then you want to know, can you reinvest the money without being charged taxes again, when I make withdrawals. No, you're not paying this back to your 401K. This is money now that they're going to pay you. And what are you going to do with it? Where are you going to invest it? Hey, in your 401k plan, you could have kept it invested in the stock market and you could have even converted some of it to a Roth IRA or a Roth 401K. KT! Why are you laughing at me? Because I'm going to call this show pushing Suze's button. You pushed every button I had here, Gwen, and that's going to be the name of this show. I'll tell you why because I'm now just answered two out of three questions or maybe all three of people who say they've listened to me; they were thinking about doing something. What have I been saying? Like, doesn't even matter. The next one is another. Don't do it, Gwyneth. And if you do April fool's is coming up just saying. Here's another one, this is this. But come on. Hi, Suze. I don’t like your face. My husband. and I love her, but she's got to look on it like I'm going to Get you again. Here comes another hi, my husband and I have an equity line for approximately $75,000 at 4% interest. We also have three children that will likely be going to college, starting two years. We need to add 45,000 to the emergency fund, six months savings. The 529's have small amounts 20,000, 20, and 12. So should we focus on saving or paying down the equity also we plan to sell our home in 8ish years and downsize. So Kara I think wants to finance obviously the kids to go to college. Let's remind her about that. Alright, there should probably be a Suze's School. The reason it should be a Suze School is you have a home equity line of credit for $75,000 at 4% interest. Currently you do not have a home equity loan where the interest rate would be fixed. You have a line of credit. Can you tell me Kara what is happening right now with the Federal Reserve? Did you not hear that just a few days ago that the Fed chief came on, Paul comes on and he says, you know what I think, which is why by the way the markets popped the other day up, I think we need to raise 50 basis points versus just a quarter of a basis point. When the Feds raise interest rates, the interest rates on your home equity line of credit is going to go up and up and up. So, there's 4% that you're paying right now on $75,000. Very likely could go to 5, 6. I remember them as high as 9, 10, 11% just a number of years ago. So no, you are not to focus on savings. You are to focus on paying down your home equity line of credit, everything that you have, including the money that you're thinking about continuing to save for your kid's college education, you know, because they're starting in two years. Good. Let him go to a community college. Let them use the money that they have. Let them work on summers. I don't care what it is, but you do not have the money to make it easy on your kids so that they don't take out student loans. They don't learn responsibility and why should they? So, don't take this as an insult what I'm about to say, but take this as seriously loving advice, which is you are older now, you don't have enough in emergency funds. You still need $45,000 of an emergency fund for just six months, Right? And you have $75,000 in an equity line of credit, which means what that you've been spending more than you've been making. You have been living above your means, not below your means, but within your needs. So, you don't want to set that example for your kids. So therefore, I want you to stop focusing on the kids. I want you to start focusing on yourself. I want you to start living a respectful life that you can afford. That means you need to go through all your expenses and cut out everything you can. And even though you plan to sell your home in 8ish years in downsize seriously, you might think about doing that right here and right now when homes are going for skyrocketing prices and really start yourself on the right path right now, it doesn't hurt your kids if they all shared a room and see what she has to do this with her husband, they have to both be on the same page. Well of course they do. Oh, I didn't say that because I'm just yelling at her yelling at Kara, yell at both of us. Let me rewind here, Kara and your husband. I don't know what your husband's name is, but boyfriend, you better be listening to me. So, you just you tell him that. All right. Ah I feel like you know what, I feel like KT, I feel like people once again are starting down the path of getting themselves in to financial trouble. They are just making decisions that are horrific. They're not thinking about it. They're just doing it and I don't get it. I don't get it. I don't get it. Alright, I'll calm down. Sorry, take a sip of water, take a sip of water. Me calm down, calm down. All right, take a sip, Hold on, everybody. Next one is from Ashley. She said hi Suze and KT loved the show and was very happy to hear your voice is back. Quick question. How can we determine how much we can contribute to our Roth IRAs once we may be past the income limit? So, I have been contributing to the max to my 401K to reduce my income, but I still always feel like I'm cutting it close and unsure of whether or not I'll be eligible. So, there you go. She said what advice can you give her? What are your thoughts? So how does she. This one aggravates me too. I'll tell you why this aggravates me, and you need to all listen to this. What sense does it make for you to fully max out or put all this money pretax into a 401K plan at a place of employment that also offers which Ashley's does by the way. Right? Which also offers a Roth 401K. Simply. So, you can do what put money into a Roth IRA so you qualify. That is just plain stupid. And it is because a Roth 401K especially if it matches, allows you to put in so much more into a Roth 401K than a Roth IRA which will only allow you to put in 6 or $7,000 depending on your age. So, you could put in so much into a Roth 401K. So, stop it. Ashley stop trying to qualify for a Roth IRA and just put as much as you possibly can into a Roth 401K. And you'll be fine. And then if you do that and maybe you figure out at the end of the year that you would have qualified for a Roth IRA then just open up a Roth IRA and do that as well and or do a backdoor Roth as long as they still allow them, which they do. But stop trying to qualify everybody for a Roth IRA if your company offers a Roth 401K. Ugh Gone. Well KT, it makes no sense. They're putting all this money into a traditional 401K that eventually will be taxable to them when if they just did a Roth 401K. They could be investing and following the rules and investing tax free and not worry about it. Don't worry about it. And it's just ridiculous. Next is from Elizabeth. I have a headache. I know I'm so sorry I was hoping that I picked some real diversified situations here but every one of them were making such mistakes. I know you're playing April fools on me early. You are, aren't you? I can tell you a little this is called Pushing Suze's Buttons. Do you understand all why it's pushing my buttons? Do you understand how for almost 40 years? I've dedicated my whole life to educating all of you how to be smart, strong, and secure with your money and yet somewhere you're all getting advice from somewhere who's just giving you the worst advice I've ever heard and you're getting yourself in trouble and that hurts me because I want all of you to live a life that is free from financial worry that you don't have to go, oh my God, why did I do that? I want the best for you. But you many of you obviously aren't taking the time to make sure that you're doing the best for yourself. Alright. Alright. Next one's from Elizabeth. Suze. I emailed you over a year ago to seek advice on whether to continue living with my in laws and take over the house upon their death? Your advice was to keep living with them. Now that I've listened to your podcast on avoiding home ownership disasters, I'm concerned the house is in their names. What is the best way to protect the house so that we can live in it indefinitely if they were to pass without huge tax ramifications. Technically we are currently paying rent but would like to work on paying it off early but are hesitant to do that when it's not legally in our names. Would it be in all of our best interest to change the deed to joint tenancy with rights of survivorship. So, what are you going to tell Elizabeth? This is a little tricky. Not tricky. Alright. Tell her what to do. My dear Elizabeth. First of all, you should consider yourself so lucky that you have family members where you and your spouse, you’re in laws can all live together as a family and take care of each other. So here Elizabeth is what I want you to do and what I don't want you to do, I do not want you to put your name on the title is joint tenancy with right of survivorship. Because if you do that, you’re in laws are also giving you their cost basis on the house. If they paid $200,000 for the house. And now let's just say that house is worth 800,000 which is possible. Your cost basis is 100,000. Their cost basis is 100,000. You split the original cost basis. Why would you want to do that? Because when they die, you're going to have to if you want to sell the house or whenever you go to sell the house, you're going to have to pay a lot of tax on it. This is what I want you to do. If you simply created a Living Living Revocable Trust Trust, they created it where you are entitled to that house after they die upon their death, you get a step up in their cost basis. If there's cost basis was 200,000 and now the house is worth 800,000. Your new cost basis is 800,000 on the house, you turn around and you sell it right away. No taxes. Oh, you want to keep it for a while, That's fine. Now you only pay a gain and anything above your $500,000 exemption plus the 800,000 because you've been living in it as your own home. So therefore, you get an exemption, you and your spouse, and you could sell it for 1.3 million and not pay any tax. So, you have to be very careful here. If I were you I would sit down with them, I would tell them your fears and I would absolutely create a Living Revocable Trust that says you guys are the beneficiaries upon their death and you're going to have to trust that Elizabeth play Suze's podcast To your in laws. Yeah in laws. Thank you so much for allowing Elizabeth and your son, your husband, your son to live with you. You know what a fabulous thing. Lucky thing. But now take care of Elizabeth's fears and see what you both can do to make sure that this works out the way that I know you would want it to. What time is it, KT? It's quizzie time. Now I'm doing a different kind of a quizzie for you. It is and it's one for actually all of you as you know quizzie time is where one of you have written in, I've read your questions and I choose one that I want you to be able to answer on your own as well as KT. Now for some reason as of late KT hundreds of people have been writing in under the topic. Can I afford it? And many of you write it and say can't you bring back the, can I afford it segment? So, I think bringing it back in the form of a quizzie is interesting as to how would you answer this person's question? So, this person's name is Sarah and Sarah says I am writing to ask if I can afford to buy a home. All of you may want to take out a pencil and paper. Mm hmm. Sarah has been approved for a $310,000 loan. She currently rents her lease is going to end in four months. Her daughter starts high school in fall of this year, and she would like to move closer to her daughter's high school. She liked to drive her daughter to school every day. So even though she says she can move into another rental, the current market in her area is such that a two-bathroom apartment is renting for 1,750. So, she's wondering if it would be best to invest that $1,750 into a home. Here are her stats everybody. So, you seriously want to write these down Again. She is 41 years of age. All right. If she decides to rent, it will be $1,750 a month. She brings home $4,800 a month. Her expenses, Our $4,800 a month. She's been preapproved for a $310,000 mortgage. Okay. She has $36,000 in savings. That is it. She has $4,800 a month in expenses, But only $36,000 in savings. So just to give all of you a hint just to start what you would all be doing to figure this out is you would first start with the fact that her expenses are $4,800 a month and I have asked all of you to have a 12-month emergency fund. So that would be $57,600 in an emergency fund. So, she is almost $21,600 short of an emergency fund. And that is before her down payment. She has $40,000 in a retirement account. And the last thing you should know is that she filed for chapter seven bankruptcy with a home foreclosure just six years ago. Oh, ouch. She can't do it right. But now she wants to buy a home. She's denied totally denied. Well, first of all you said she brings home $4,800 a month. Her net income. Her expenses are 4,800 months. She has 36,000 savings. She has 40,000 in retirement. And I don't understand how she's going to be able to do any of this if she doesn't have. There's not even a cushion here. She's saying that the difference between her mortgage and household expenses and everything is what I would currently pay in rent and it would come from what I contribute to savings. Is she approved or is she denied? And she has a she filed bankruptcy. Is she approved or is she denied? I think she is denied. Say it like you mean it, girlfriend. Sarah, you're denied honey, Sarah with all our love to all of you and to save you from claiming another possible bankruptcy one day, one day you can do it. Cut back on expenses and really just really just wait. This is not the time right now. Right, KT, you know what time this is then after quizzie time is what time? Goodbye. Good, good, good, good. It's not good night because it's still morning for us and it's like it's okay. Whatever. Alright, everybody until Sunday. There's really only one thing that we want you to remember and that is for you to all be safe, strong, and secure. When are you going to get it? Right? I got it. No, you didn't Safe, strong, and secure. Strong, safe, and secure. I don't think so. Oh, she's written it down. Wrote it down. So, everybody is still Suze. I think that I'm right. Alright. Everybody safe, strong, and secure. All right. She's right. What can I say? Stay safe, strong, and secure. You're right, my love. All right. See you on Sunday for Suze School. Alright. Bye. Bye, bye.
Take advantage of the Ultimate Opportunity Savings Account with Alliant Credit Union at: https://bit.ly/3vEUTZW
Join Suze's Women & Money Community for FREE and ASK SUZE your questions which may just end up on her podcast!
To ask Suze a question, download by following one of these links:
CLICK HERE FOR APPLE: https://apple.co/2KcAHbH
CLICK HERE FOR GOOGLE PLAY: https://bit.ly/3curfMI
Answer Yes or No to the follow statements.
I pay all my credit card bills in full each month.
I have an eight-month emergency savings fund separate from my checking or other bank accounts.
The car I am driving was paid for with cash, or a loan that was no more than three years, and I sure didn’t lease!
I am contributing at least 10% of my gross salary to a retirement plan at work, or I am saving at least that much in an IRA and/or regular taxable account.
I have a long-term asset allocation plan for my retirement investments, and once a year I check to see if I need to do any rebalancing to stay on target with my allocation goals.
I have term life insurance to provide protection to those who are dependent on my income.
I have a will, a trust, an advance directive (living will), and have appointed someone to be my health care proxy.
I have checked all the beneficiaries of every investment account and insurance policy within the past year.
So how did you do?
If you answered yes to every item, congratulations. If you are working on improving on a few items, I say congratulations as well.
As long as you are comitted to truly creating financial security, I applaud you. If that means you are paying down your credit card balances, or are building up your emergency fun with automated payments, that’s more than fine. You are on your way!
But if you found yourself saying No to any of those questions, and you’re not working on moving to Yes, then I want you to stand in your truth. No matter how good you feel, you have some work to do before you can honestly know what you are on solid financial ground.
Credit & Debt, Saving, Investing, Retirement