Podcast Episode - Ask KT & Suze Anything: Should I Stop Paying Into My IRA to Get Out of Debt?

On this new edition of Ask KT and Suze Anything, Suze answers questions about sharing inherited IRAs, traditional 401(k)’s versus ROTHs and so much more.

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Podcast Transcript:

Suze: May 15, 2025. Welcome everybody to the Women and Money podcast as well as everybody smart enough to listen. Drum roll introducing the one and only

KT: KT. Today is Ask Suze Anything starring KT.

Suze: What else is today, KT

KT: May 15th and we're going back to the island finally.

Suze: We have been in Florida for one full month.

KT: Yes, yes.

Suze: One day we'll tell you why, but that's besides the point. But today we get to go back to our home in the island, so KT could not be more excited if she tried, right?

KT: I'm very happy because this is now coming into the season. I love the most, which is summer.

Suze: What do you love about it?

KT: Hot, calm, beautiful, long days, early mornings, late, late nights...

Suze: And hurricanes.

KT: Well, that's at the end of the summer. That's called hurricane season. This is just lazy summer floating around with Suze in the ocean, very calm summer.

Suze: All right, so today is Ask KT and Suze anything if you have a question that you would possibly like for us to answer it on the podcast, please write into ask Suze podcast@gmail.com. By the way, you're better off just writing into ask Suze podcast at gmail.com.

Suze: Versus sending in a question on the Women and Money community app for some reason, don't ask me. Those don't necessarily always go through. So if you have a question, ask Suze podcast at gmail.com. KT, let's begin.

KT: My first question, Suze...

Suze: My voice is hoarse today, huh, is down.

Suze: What is my voice today?

KT: It's OK. It's getting a little better. Suze had lots of procedures on her throat, so we're trying to get rid of this cough you all know about. But today is pretty good.

Suze: Pretty good. But that's why we've been here for a month.

KT: Yeah, not bad. All right,go on.

KT: So I'll do most of the talking, right? This is from Whitney.

Suze: I got news, everybody,

Suze: even if my throat is 1,000%, KT always does most of the talking anyway. Go on.

KT: Yes, she does, and this is from Whitney. She said, Suze, here's why I'm writing. I've just gone through a divorce, and one of the major reasons I divorced him was our different approaches to money. So true, right, Suze.

KT: So she said, my ex-husband is an extremely prominent world class scientist who is known throughout his field as just about the best in the world. He can do the most complicated mathematical computations that one can think of. However, this is funny, when it comes to the simple arithmetic of income minus expenses, he struggles.

KT: Just goes to show that even if you are a highly educated professor at a university sometimes common sense isn't so common.

Suze: Now I actually gave that to KT to open up today's podcast. Do you wonder why KT?

KT: I think it was funny.

Suze: You think it was funny, but I know it's true. When I was actually seeing clients, had my own firm.

Suze: And everything what absolutely puzzled me is that doctors, lawyers, neurosurgeons, you name it. They were so horrible with money I can't even tell you, and I almost got to the point, everybody seriously KT, that because I always had a waiting list of people wanting to see me, that one of the questions was, are you a doctor? And then you wouldn't see them.

Suze: And then really we would put them down to the bottom of the list because it was just so frustrating to me because number one they always thought what they thought was correct, even if it wasn't.

Suze: And they didn't understand the simplest of things just like Whitney was saying. So the reason that I wanted that is because maybe you're in a relationship with somebody who is a brainiac, very high powered job, knows everything, very intellectual, who knows what that doesn't mean they're good with money.

Suze: Because money is all about emotions and that's what we learned on last Sunday's podcast.

KT: And a lot of common sense.

Suze: I just want you to be aware if you're in a relationship with somebody who makes a lot of money, very high powered, regarded by everybody as this most brilliant person around, it does not mean that you should lose your power thinking that they're better at it than you cause chances are they are not. All right, KT.

KT: OK, so Suze asked me to redo a question that we actually had on last Thursday, but the information that she gave to this question was inaccurate.

KT: So we were redoing it and we've got a much better and more succinct answer and guidance for all of you and it's kind of sad this question. Hi, Suze, my 60 year old sister recently passed away.

KT: Her 401k is worth $281,000. My other sister and I are the beneficiaries. I'm 62. My sister is 64. So all these girls were in their 60s, and the young one died. She said. We also have two other siblings we wish to share it with. They are 59 and 64. We're all still working.

KT: The funds will be transferred to an inheritance 401k. What is the best way to share with our other two siblings?

Suze: Yeah, now here's the thing. Notice that in this question, it says that the funds will be transferred to an inheritance 401k.

Suze: All of you have to understand that the way a 401k is done in most corporations versus an inherited IRA is very, very different, so I answered as if the money was going to stay in a 401k that's inherited now many corporations listen to me closely, do not really honor the Secure 2.0 act where if you are an eligible beneficiary that you can then do what take it out over your life span. They would simply say in most corporations that you have 10 years to wipe an inherited 401k clean, and that's how I answered the question.

Suze: What's important for all of you to know is if you're ever in a situation where you have money that you're inheriting from a 401k, you're far better off transferring it to an inherited IRA in your individual names and so the sisters that is what you should do now because it will be in an inherited IRA now you are what's called an eligible designated beneficiary.

Suze: Which means that you can take this account over and stretch the withdrawals over your entire life expectancy, and why can you do that? Because you happen to be an individual that's not more than 10 years younger than the deceased IRA owner, which you're not. You're actually older than her.

Suze: But it doesn't matter if you're older, you also qualify as an eligible designated beneficiary. So the correct answer to this question is if you do an inherited IRA in your individual names.

Suze: You are an eligible designated beneficiary, and you can absolutely take it out over your life expectancies. You do not have to wipe it clean in 10 years at what KT?

KT: How do they share it?

Suze: They share it now this becomes a little difficult because it depends how much do they want to share and because it's in a traditional inherited IRA. Any money they take out, they're gonna have to pay ordinary income taxes on it, so they're gonna have to decide do they want to take a lump sum out.

Suze: And just give it to the sisters minus the tax that's going to be owed on it. Are they going to take it out in small little lump sum?

KT: So in essence they have to have a family meeting to determine how they all wish to share this.

Suze: Yes, but if they share it, they need to make sure that it's equal and that the sisters also have to pay income tax on whatever is being shared.

KT: Everyone shares the expenses as well.

Suze: Yeah. OK, OK. All right.

KT: Well, that's clear. So next question's from Gillian. She said, hi Suze, I'm a federal worker stationed overseas. I have two dependents, spouse and child. I am the sole breadwinner. I used to feel like my job was stable, but as you know, we are living in fear of losing our jobs at any moment.

KT: What a shame, right? No comment here, Suze.

Suze: Stupid.

KT: I know. Anyway, so Gillian said, I have significant debt but still pay into my TSP. And have a decent emergency fund.

Suze: Now everybody at TSP is a thrift savings plan, which is essentially a 401k or 403B, but it's for federal employees alright, go on.

KT: So her question is, should I stop paying into my TSP and use both that money and the emergency fund money to pay down debt?

KT: Note, now this is important, she said. Doing this won't even cover half of my debt.

Suze: Now, KT, if you are going to answer that question, what would you say?

KT: If I did a pop quizzy...

KT: I would say um no I don't think she should stop paying into the TSP and I definitely would not use that emergency fund money.

Suze: And why shouldn't she stop paying into the TSP?

KT: Because that's growing, and I think that what she has to do is, is use other monies to pay down the debt.

Suze: So, all right, so pretty good KT kind of ding ding ding. Listen to me.

KT: Was that a little pop-up quiz because we weren't gonna do them anymore.

Suze: I know a little pop up quizzy.

KT: Do you all miss the quizzies, everybody?

Suze: Don't ask us if they say yes, I'm gonna do it again. KT was always so nervous about these quizzies.

KT: When the

Suze: quizzy

KT: time came up, I was like, let's hurry up and finish this recording. I hated the quizzies because I didn't get them right.

Suze: And then I realized if KT hates anything, why the heck are we doing it? That just was stupid, so I stopped the quizzies. But here's the thing I want all of you to know the key answer to this question.

Suze: Is... note doing this won't even cover half of my debts, so she can stop putting all this money towards her retirement, and it still will not help her with her debts. There is a rule of thumb, when you owe more money than you are worth, you are essentially bankrupt number one. Number two, and none of you ought to forget what I'm about to say. Your TSP. Your IRA, your 401k, your 403B are all protected against bankruptcy.

Suze: So if you put a lot of money into your Roth IRA into your TSP, you built it and built it and built it.

Suze: Guess what, if ever you needed to claim bankruptcy, that money would be safe and sound. Therefore, no, do not stop putting money in a place that's safe and sound. Now if you had said to me, if I did this, I'd be out of debt in like 6 months or 8 months, different answer. But given the fact that you have so much debt.

Suze: I have a feeling that especially if you lose your job, you're the sole breadwinner, and on and on, uh, we may be heading for a situation that you just want to protect everything you possibly can. All right, go on.

KT: This next question is my favorite because of the name Lupi.

KT: This is from Lupi. I, I love that name.

Suze: Her name's Lupi,

KT: L U P I Lupi. Love that name.

Suze: You know why she really loves that name? KT and I used to have a little favorite word, right, that, that when I was on TV that I would let her know I was thinking about her and it would be like do

Suze: whatever it could be, but like some loopy loopy doopy and it was kind of like pulling my ear.

KT: She'd say like the markets are really doopy loopy today, KT and I knew or she'd say today, and I knew it was for me. All right, so, so this is from Lupi. She said, Hi, Suze, thanks for sharing all of your knowledge. I'll be 70 this summer and will begin taking SSI the last 4 months of the year.

KT: Filing jointly with my husband, I project our combined income for 2025 will be less than that $60,000.

KT: I'm contemplating converting a portion of my traditional IRA to a Roth this year. My goal is to convert just enough to keep us in the current tax bracket, which should be 12%.

KT: Is this a good idea to do the conversion in this down market?

Suze: As you're reading this, this market is not a down market anymore.

KT: Not anymore. This email was sent a little while ago, but it sure isn't the same today.

Suze: Now, first of all, it's true. So if her income is $60,000 her base income per year, that's approximately $30,000 under what it would be for her to go to the next income tax bracket, which would be 22% by the way. So she has approximately $29,450 that she could convert.

Suze: And still stay in the 12% tax bracket, so that's just something that she should look at if she wants to do it. What you should be doing right now because these markets have really gone up so and aren't you all thrilled that you stayed in, that you didn't get out, that you just kept dollar cost averaging, and now you have stocks like Palantair almost at $130.

Suze: Are you kidding me? Really, you all should be so happy right now. But then another month from now when it turns around, you're gonna be so depressed again. The lesson you have got to learn from all this is just stick with it.

Suze: Just keep dollar cost averaging. Just stick with what's good and everything like that for you, my dear Lupi. What you should be doing seriously is take a look at your portfolio and anything that really hasn't skyrocketed that much. Why don't you just convert, even if it did skyrocket? It's possible that it's gonna continue to skyrocket. You know, it's projected now, Mr. Fitzgerald says that he thinks Palantair's gonna go to 200. Wow. So if you happen to own Palantair, for instance, you can't just wait till something goes down. You have to decide, I want to keep it. I'm just gonna convert it. 

Suze: So just start doing it now little by little so you stay in the 12% tax bracket and just get the money over there. It's no longer a down market and you just can't necessarily say I'm going to wait because it may not be a down market again,

Suze: That it might be down for a

KT: while, but who knows?

Suze: That's right. So KT, tell everybody

Suze: what you said to me yesterday after I said to you, Look, KT, we're back way up again in our portfolio.

KT: I said, make sure we don't go back down again.

Suze: So she and she was serious.

KT: I was serious. I said, Great, how do you, how do you stay up there, Suze?

Suze: And I said, you probably don't.

Suze: So everybody wants to always stay up there, but they don't like when it goes down.

KT: For years she would come in and say, KT, your Apple shares, for instance, your Apples are up like

KT: 500 points or whatever and I'd say sell them that my answer to every time she announced that I had a gain I'd say sell it just like that and she would laugh at me and walk out of the room and I'm really glad she did because if I kept doing that, I actually wouldn't get anywhere, quite honestly.

Suze: And just so all of you know.

Suze: I don't plan, I hope KT doesn't either, to sell anything that we have. I think they're all incredible investments. I think if the market goes down dramatically again, I will just buy more of what I already have, and so I'm thrilled when the market goes down.

Suze: And I love seeing it go back up again, but overall the trend is really up right now, KT we're no longer in my opinion in this like bear market that's gonna go down, down, down, down, down. I think overall these markets are up at this point in time, so maybe Sunday I'll go over some areas of the market.

Suze: That I think are probably really good for all of you to be involved in in case you're not.

KT: I think that would be a great idea. It's, it's a good time to do that.

Suze: Yeah, give me one more question.

KT: OK, so I have one here from CP and she said, this is Carol. She said, Hi, Suze. I had a 401k from a previous employer that I rolled into a traditional IRA.

KT: I was then advised to contribute into the IRA, which I have been doing for years. I just realized after hearing some of your podcast that I was contributing after-tax amounts to pre-tax IRA for which I'm not getting any deductions.

KT: I mean that's crazy, right?

Suze: Well, she could have been doing a Roth the whole time and getting tax-free growth.

KT: So wait, let me finish telling you what she's doing. I just stopped contributing to the IRA. I'm 52. I can't withdraw from the IRA yet.

KT: Question is, can I withdraw the after-tax contribution I made in the IRA without paying tax on the total amount and open a Roth IRA as you advise to open a Roth for tax-free withdrawal? I need guidance on this, Suze. I appreciate it. Thank you so much. So Carol is a little bit confused.

Suze: Yeah, so Carol, I'm so sorry that your financial adviser didn't take the time to just give you a little bit more guidance that said rather than contributing after tax dollars to your IRA that you already have, which simply means that you're putting more money in there, but the growth of that money is still gonna be taxed to you as ordinary income when you withdraw it.

Suze: All he or she had to say to you is, why don't you just open up a Roth IRA, put the money in there obviously with after tax dollars, let it grow, and it will all be tax free. But no, they didn't take the time to say that. But here's what you need to understand now with a straight Roth IRA.

Suze: You can take out any time you want, regardless of how long the account has been open or your age, your original contributions that you put in, so if you put in $7000 a year ago, $7000 this year, whatever it may be, you could take out the $14,000 no taxes, penalties doesn't matter. It's the growth on that money that you cannot touch until you're 59.5 and the account's been open for at least 5 years. At that point then everything in there is tax free.

Suze: You would think that that's how an IRA works that you put in after tax dollars, but it is not. It is very, very different. So whenever you make a non-deductible an after-tax contribution to a traditional IRA, you establish what the IRS calls a basis in that IRA, the amount in which you already paid taxes on. So first of all, do you know the amount that you have put in to that IRA and that is your basis.

Suze: All future distributions listen to me closely now from that IRA are then treated under the pro rata rule, so you cannot simply pull out only your after-tax contributions, girlfriend. So here's what you have to have done hopefully.

Suze: Did you file a form 8606 every single year? You needed to do so because it's right there that it keeps track of how much in a nondeductible contribution you made, so that's important because now you have choices ready. Why don't you just do a total conversion to a Roth IRA with everything that's in there.

Suze: If there isn't that much money, you then get the after tax contribution that goes into a Roth.

Suze: You then only owe taxes on the earnings and the part that was taxable in the IRA, but then everything is in a Roth IRA done just that simple. Now you may have too much money in there to do so, and it might affect your tax bracket, but if I were you, I would look at converting it to a Roth because it's such a mistake to leave after tax.

Suze: Money growing taxable within your IRA. It is such a waste. So can you just see a CPA and get that to happen for yourself? All right, KT...

KT: That was a wrap, Suze.

Suze: That's a little bit of an early wrap because we are packing up to get on the plane to go back home. Do you think Colo remembers what we look like?

KT: No, not at all, but he's very excited.

KT: He's excited. He misses us, even if his wife was with him. He so misses us.

Suze: Are you sure?

KT: Yes,

Suze: We'll find out shortly. So until Sunday when we are back with Suze School, there's only one thing that we want you to remember when it comes to your money. What is it, KT?

KT: Use lots of sunscreen. Stay safe.

Suze: No, actually KT, have you been reading the reports on sunscreen?

KT: No

Suze: Horrible.

KT: Oh, don't use lots of sunscreen. You just wear a hat and stay out of the sun.

Suze: Yeah, like we do. But anyway, just remember people first...

KT: Thne money...

Suze: Then things. Now you stay safe. Bye bye.