January 09, 2020
Listen to Podcast Episode:
In this podcast of Ask Suze Anything, we hear questions from Women & Money listeners Diane, Anthony, Lune, Christina, Allie, Julie, Roseline, and Shelia.
Welcome to another edition of Ask Suze Anything. This is where you write in to Ask SuzePodcast@gmail.com, that's S-U-Z-E. You ask a question and if chosen, I will answer it on this podcast. And again, you never know, you just never know when I will answer it directly.The very first one is from Diane, and she says, hi, Suze. I enjoy listening to your podcasts on my way to work. Periodically, I want to go back and hear your thoughts on an issue, but there doesn't seem to be a good way to search by topic.Guess what, Diane? You could not be more right if you tried. And recently, we have just transcribed every single podcast that I have done from the very beginning, and we're going to create blogs out of them that you will be able to search by keywords. So, I'll give you more information on this in a little bit when it becomes available. But, because you happened to write in, we're directly going to send you a link so that you, before anybody else, can search them to find out what you need to know, and it will be available to everybody else shortly.All right, this next one is from Anthony, one of the men smart enough to listen. Hello, Suze, I have been a huge fan for years. Thank you, my dear Anthony. My situation, I went to college and then graduate school, getting my doctorate in pharmacy. I now have a job that I love in the pharmaceutical industry. However, I have huge student loan debt from graduate school, currently around $225,000. Yeah, OK. Anyway, he goes on to say, luckily, it is all federal student loans, and it makes most sense that I take advantage of the pay as you earn income-based repayment plan. Here I pay 10% of my adjusted gross income yearly, currently at $750 a month, and the leftover debt is discharged after 20 years. My question is, I am aware that I will be taxed on the amount that is discharged in 20 years when I will be 51 years old, with that discharged amount being counted as income. I expect that the discharged amount will be $250,000. I know that if I proved to be insolvent when the amount is discharged then the IRS can erase that extra tax bill, any advice or ideas here?Now, before I go on and I answer Anthony as to what I think he should do, I just want to make sure that you all understand exactly what we're talking about. When you take out a student loan, again, student loans, in most cases, cannot be discharged in bankruptcy, and you have got to pay that student loan back. The best way to pay a student loan back is under the standard repayment method, which is that over a 10-year period of time, you pay the loan and it's gone. Now, in Anthony's case, with $225,000 of a student loan under the standard repayment method, his monthly payments would be approximately $2250 per month. But obviously, Anthony can't pay that, so he's under what's called the income-based repayment method, which is a variety of methods that the government has created so that your payment for your student loan will be based on the income that you are currently making. So, in this case, Anthony is paying $750 per month. But even though Anthony is paying $750 per month, after 20 years, in Anthony's case of paying so, he will still owe approximately $250,000 on this loan. And when this loan is discharged, he will owe ordinary income taxes on that $250,000. Big shocker to people because most people don't know that's how it works. Obviously, you can have public student loan forgiveness if it will work, where after 10 years of working for a nonprofit, your loan is forgiven and you do not have to pay taxes on anything. But, if you're not doing public student loan forgiveness and you're on an income-based repayment program, then you will owe taxes on whatever money is discharged.Now, you may be thinking, but Suze, how is that possible if he only owes $225,000 today, how is it possible that 20 years from now, after paying $750 a month, he would owe $250,000? So, listen carefully, because everything is based on the standard repayment method. If Anthony goes on the standard repayment method, $2250 per month, and all he can pay is $750 per month, that's a $1500 a month difference between what he should be paying and what he is paying. That $1500 a month is added on to the back end of his loan, and the interest that he is currently paying on that loan he will also be paying on that $1500 every single month for 20 years. So, after doing this for 20 years, he owes actually more in 20 years, $250,000, than he currently owes right now. So, Anthony is saying to me, what should he do?Now, as I've said on previous podcasts, if you are insolvent, which technically means you owe as much money as you are worth, and technically you're bankrupt and it just gets totally dismissed, and you don't have to worry about it. But you don't want to be insolvent. You don't want to go and get yourself a degree and work 20 years in, have retirement accounts, own a home, own it out-right, whatever it is, just simply because of this. No, that is not the answer. So, the real question is, how bad? How bad is it when you have a situation like this? So, I actually wrote Anthony back and here is what I told him. And this applies to all of you that are in this situation because so many of you are under income-based repayment plans. And you don't know what you're going to do in your living in fear of, oh my God, I'm going to owe taxes on a few $100,000 later on. All right, I want you to listen closely to me right now.If Anthony was to convert to the standard repayment method right here and right now, he would have to come up with $1500 more a month than he is currently paying. Therefore, in those 10 years at $1500 more per month, he would pay in total above what he is paying right now, an additional $180,000. Just keep that amount there. $180,000 more than what he is currently paying.Or, Anthony has another choice. Anthony can continue to do exactly what he's doing right now, pay the $750 a month, keep going for 20 years, just like he's going, knowing that he's going to probably owe at least $125,000 in taxes on the $250,000. All right, so that's about 50% tax bracket between federal and state. OK, now, you don't just wait for 20 years to figure out, well, how am I going to come up with $125,000? If Anthony puts away, starting now, $500 a month, do you know that if he put away $500 a month just at 2% for 20 years, that that would give him $147,000 before taxes? If hey, we were going to include taxes on this, he's still going to come out with about $135,000. But that $500 a month or $6000 a year over 20 years is $120,000 versus the $180,000 more that he would have to pay right now to get it paid off in 10 years. So, given the fact that he can't afford that, if he just does this, he'll be fine.So, Anthony, you should continue on the pay as you go. All of you should, if you can, continue on the pay as you go if you cannot convert to the standard. But, start figuring out now what is going to be your tax liability and start putting that money away little by little, so that 20 years from now, when it is discharged, you'll have the money to pay the taxes. I hope that made sense to all of you.All right, this next one is from Lune. She says, should I have my retirement savings be inside a trust and then distributed to beneficiaries to avoid distribution taxes after my death?Lune, you have to listen to me. If you have a retirement account, a retirement account cannot be held within a trust. I've said this over and over again, but I obviously need to say it again. And IRA stands for individual retirement account. A 401k, a 403b, is an employer-sponsored retirement account. It has to be owned in the individual name, so an IRA has to be owned in your name. A 401k or a 403b has to be owned in your name, the employee's name, so it cannot be owned within a trust. And then you ask, so that it could be distributed to the beneficiaries to avoid taxes? The reason that I have been telling all of you to really look into Roth IRAs, Roth 401ks, Roth 403bs is, especially now with the SECURE Act, that makes it so that your beneficiaries other than your spouse, because remember, your spouse has different rights than everybody else. They can assume your retirement account as if it was their own. But your beneficiaries, other than your spouse, can no longer do what's called a stretch IRA if they inherit this at any point from now until the future. So, they have a 10-year maximum period of time to withdraw the money in your IRA. Now, if you had a 401k that was a Roth, a 403b that was a Roth, and IRA that was a Roth. You wouldn't have to care about that because on your death, all the money within those retirement accounts when they go to your beneficiaries, would be absolutely tax-free.That's one of the reasons why all of these years I've been saying to you, do a Roth, do a Roth, do a Roth because you knew that eventually, they were going to have to start changing the laws. They were going to have to start making it so that your beneficiaries paid more and more taxes sooner because the government needs the money. So, the best way for your beneficiaries to avoid taxes after your death is to make sure that your retirement funds are in a Roth retirement account. It is just that simple.You know, in that in the same vein as the last question, where Christina is asking, thanks for all your advice. I'm a teacher, and I have been contributing to a 403b for some time now. I have recently heard about a Roth 403b. I currently have a Roth IRA, which I max out every year, and I make contributions to the 403b. Just wondering if there's an advantage to the Roth 403b over the traditional 403b, pretax. Any advice you have would be great. Christina.Christina, as I just answered in the last question, the advantage is this. That, yes, you pay taxes on that money now and then you get to invest it. But any growth on that money, especially when you retire, you get to take it out, absolutely tax-free. And in a Roth IRA, the great thing in a Roth IRA is, that you can take out your original contributions anytime you want, regardless, how long that money has been in there or your age. And when you do so, you do not have to pay taxes on it at all, so it can serve as a place, if you're really in trouble and you need money, a Roth IRA is a fabulous place that you can go to. Remember, it's just on your original contributions, not on your earnings until that account has been open for five years or until you are 59 and a half as well. But yes, Christina, if I were you, I would have all my money, if I could, in a retirement account that was a Roth, a Roth IRA and a Roth 403b. Pay the taxes now so that later on, you can get access to this money absolutely tax-free, and upon your death, your beneficiaries, other than your spouse, if you're married, can also access it tax-free.Funny, I'm looking at all the questions to answer this Ask Suze Anything, and they all seem to be about Roth IRAs and Roth 401ks. So, I'm just going to continue to go on because this is the beginning of the year. This is, a lot of time when you decide, should you open up a Roth IRA? A traditional IRA? Where should you be putting your money in your employer-sponsored retirement plan? Again, a Roth retirement account is the best retirement account you are ever going to have, bar none. Give up the tax write-offs today to have tax-free access forever, later on.Hi, Suze, Happy New Year. I just listened to your podcast about the SECURE Act. Thoughts on me transferring an IRA and 401k into my Roth IRA and Roth 401k? I am 49. Should I pay the tax now at a lower income tax bracket or later in life where I definitely will be most likely higher. Allie.Now, that's funny, because most people think later on in life they're going to be in a lower income tax bracket. They don't ever really think they're in a low income tax bracket now, and, a higher one later on. But I like that Allie is thinking like that. Regardless of your tax brackets, Allie, here's what you need to understand. Any money that you transfer from an IRA, a traditional IRA you've never paid taxes on, or 401k that you've never paid taxes on, you will owe ordinary income tax today on any amount that you convert or transfer. Now, you say you are 49 years of age. You did not tell me, however, how much money you have in an IRA and in a 401k. If you have large sums of money, you would never want to transfer $100,000, $200,000, $300,000 all at once into a Roth retirement account at all because you will lose a good 50% of it, depending on the state that you live in because you will have to also pay state income tax as well as federal. You're also 49 years of age, and you did not tell me how long you are going to work. So, once you start to become 50 then things start to become different than when you were 40 and 30 and 20 because you have to take into consideration, will your money be in the retirement account long enough to make up for the taxes that you paid to convert that money? And that's something that you really have to take into consideration because if you told me that you're going to retire in five years, you just don't want to work past, you know, 55 or 56 years of age, then I would be saying to you, you have to be really careful because I don't think you're going to make up for the tax savings by having converted. So, this is something that you should sit down with a CPA, an accountant, and figure out for you in your particular situation, does it make sense for you to do so? It may make sense for you to do what? Convert $3000 a year, $5000, some small amount of money so it doesn't affect your tax bracket. But just take that into consideration.And I know I'm just going to do this shameless plug, but I'm going to say this. This is why the new book that I have written is so important; The Ultimate Retirement Guide for 50 Plus. Again, I have written a book, the first one in my life, well not the first book I've ever written, this will be my 11th one. That is dedicated, really, for those who are 50 years in age and older, because what you do when you are 50 and 60 and 70 is so much different, so much different, than what you do when you're 20 and 30 and 40. And there are so many books out there and everything is geared towards the younger ones, and I decided, you know what? I am going to change that up. And if you happen to be somebody who doesn't like to read, I have to tell you the audiobook that I recorded on The Ultimate Retirement Guide, by the way, the subtitle is Winning Strategies to Make Your Money Last a Lifetime. The audiobook that I recorded is fabulous because I just don't read the book, I go off and I tell stories, and I read some of the book, and then I come back and I go off again. Fabulous, fabulous. Again, it will come out I think it's February 25th. It's available on Amazon now to pre-order, and that last week of February you will also see airing throughout the United States, my new PBS specials that I have recorded as well called The Ultimate Retirement Guide. And it's just something that all of you should watch.All right, let's go to the next question. This one is from Julie, she says. dear Suze, I have over $400,000 in a traditional IRA at a discount brokerage firm. Is there any reason to worry about having all my money at one firm, or should I spread it over a couple just in case something catastrophic happens to one of the companies?Julie, listen. If it's a major discount brokerage firm, if I were you, I would not be worried. But I'm not you, I'm me. And if you are worried, for whatever reason, then yeah, divide it up and go to two brokerage firms or three brokerage firms. But you need to know most brokerage firms are protected under something called SIPC, Securities Investors Protection Corporation. That's usually a minimum of $500,000. Most brokerage firms carry more than that, but you have $400,000 so that you are absolutely protected. But, if you are worried about it, what have I always said to you? This is your money. What happens to your money directly affects the quality of your life, not my life or any other financial advisor’s life. So, if something is worrying you, you've got to do something about it.What is the goal of money? The goal of money is what? What? What? Can I hear the answer? All of you should know the answer to this by now. Do you know the answer? The goal of money is for you to feel secure. And the mere fact that you are asking this question says you do not feel secure. So, yeah, go to a different brokerage firm and divide it up. That's what I say.We have another one on Roth IRAs, this one's from Roseline. She says. I have a question related to Roth IRA contributions. I mostly understand the income limitations for eligibility for Roth IRA contributions, but I need clarity on something. What happens if I contribute to a Roth IRA during the year and my adjusted gross income turns out to be too high? Do I get penalized?You only get penalized, my dear Roseline, if you leave the money in there. So, for those of you who don't know what Roseline is talking about, is that you've heard me say throughout this podcast that a Roth IRA, in particular, is the best. The best retirement account you can have, bar none, but it is so good that the government says not everybody can have one, so they put income limitations on it. In the year 2020, if you are married filing jointly, for you to be able to make a full contribution to a Roth IRA, the maximum that you can make per year is $196,000 a year of adjusted gross income. The maximum that you can put into a Roth IRA is $6000 if you are under 50, $7000 if you are 50 and older. If you are single or a head of household, the maximum that you can make to put in, the maximum into a Roth IRA is $124,000 a year of adjusted gross income. So here you are, you're starting to put money in, or you fund it right now for the year 2020 and you find out that you make more than that. You just withdraw it. If you don't withdraw, you will be penalized.So just so you're clear on this when you put in money and let's say you put in $6000, and you find out at the end of this year that you don't qualify for a Roth, you have got to take out that $6000 before you file your income taxes next year. If you do not take it out, you will owe a 6% penalty tax on it, which would be $360. If you don't take it out, and you do it again next year and just leave it in there, you owe the $360 again. If that money has made money, you're going to have to take that out and you're going to probably owe income tax on that money as well as a 10% penalty on it. So, you'll know you have an idea if, in fact, you're going to qualify for a Roth or not. And if you don't have an idea, just wait until you know for sure because remember, you have until April 15th after the tax year closes to contribute to any IRA, whether it's traditional or Roth. So, if you're really not sure and you want to contribute for 2020 you have until April 15, 2021, to contribute to a Roth IRA for 2020. So, if you really aren't sure what's going to happen with your income, wait and be sure rather than contribute and then have to withdraw it. Did that make sense?All right, let's just do one more. It will be from Sheila and she says, dear Suze, thank you so much for the most recent episode about the SECURE Act. I'm looking forward to your new book in March. I love that Sheila. Anyway, she goes on to say, I was surprised to hear you, unless I misheard, say a good word about annuities because I thought you were mostly negative about them based on what I recall from your TV show and your books.Well, guess what, Sheila, you are absolutely right. Shocked myself, to tell you the truth. Now, this is not all annuities that I like by any means. I talk about this, and I think I mentioned this in a previous podcast. I'm really now looking for people to have guaranteed sources of income because interest rates are so low. I am suggesting this, and I do talk about this in great detail in my new book. An income annuity. I am not talking about variable annuities, I am not talking about indexed annuities, I'm not talking about any other really kind of annuities at all, except income annuities, which could guarantee you an income for the rest of your life. But I don't want you to just hear it here on the podcast. I would like you to read about it in detail when it applies and when it does not. But that is something that you should think about because I'm telling you, I think it's going to be important.Now, I just want to say one more thing, and in answering Sheila's question, it makes me think about this. You know, you've heard me say things over and over and over again for the last 35 years, and it is true when times change, the advice has to change. You know, I've always said, don't take a loan from a 401k. Well, guess what? You may hear me say that sometimes it makes sense for you to take a loan from a 401k. You just heard me answer earlier in this podcast how Anthony, and I'm always saying in the repayment of a student loan, you should always do the standard repayment method. And now I'm saying to Anthony, I just figured it out, you're probably in your situation, better off to pay as you go.Sheila, you just heard me say that yeah, I'm looking into income annuities now. Years ago, you would have heard me say I hate them, I hate them, I hate them. But you have to understand when times change, when the economy changes, a good financial advisor, their advice also has to change with the time. And it's very difficult today when interest rates are so low, for you to be able to retire and pay your bills and feel secure and all these things. So, I have to change my advice so that all of you can remain the strong, smart and secure women that you are all meant to be. So, until next time, you stay safe. In providing answers neither Suze Orman Media nor Suze Orman is acting as a Certified Financial Planner, advisor, a Certified Financial Analyst, an economist, CPA, accountant, or lawyer. Neither Suze Orman Media nor Suze Orman makes 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. Neither Suze Orman Media nor Suze Orman accepts 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 use of the information. To find the right Credit Union for you, visit https://www.mycreditunion.gov/. Interested in Suze's Must Have Documents? Go to https://shop.suzeorman.com/checkout/cart/index/.
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.
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.