January 30, 2020
Listen to Podcast Episode:
In this podcast of Ask Suze Anything, we hear questions from Women & Money listeners Nadine, Linda, Jocelyn, and Maria.
Hi, everybody, Suze O. here and welcome to the Women and Money podcast, as well as the men smart enough to listen. This is the Ask Suze Anything podcast and this is where you write in, you have a question or a statement, or you want to just say something and if chosen It will be answered on this podcast. Send in your questions to AskSuzePodcast@gmail.com. The very first one is from Nadine. By the way, many of you have written in asking almost the exact same question that Nadine is asking, that between her and her husband's income, she is no longer eligible to contribute to a Roth IRA. So, what are they planning to do? Listen closely.They are thinking about trying to reduce their adjusted gross income to below the eligible level to qualify for a Roth IRA, where she starts to contribute to her employer's 401k plan, her husband increases his contribution to his employer-sponsored 401k plan. How does she lower her adjusted gross income is essentially what she is asking me? Should she fund retirement accounts that are taxable to be able to do so?Now, if you don't understand Nadine's question, let me explain it to you. As you have to know by now my absolute favorite, favorite retirement account of them all is a Roth IRA. I love a Roth IRA more than a Roth 401k, a Roth 403b, or Roth TSP. Obviously, if you work for a corporation that matches your contribution, which means you put in a dollar and they give you some amount of money up to 6% of your base pay, I keep saying this over and over again because you have got to learn what the rules are and what the terminology means. Obviously, if you have a retirement account that matches your contribution whether or not if it is a Roth or a traditional, which means pretax, you have got to contribute up to the point of the match.Listen again. If your corporation offers you a choice between a Roth 403b, a Roth 401k, or a Roth TSP and a traditional, and they match, your money should go into the Roth, the company's money will go into the pre-taxed accounts. That's how you should do it. If they do not offer a Roth version, I don't care, you still have to contribute to get the match of the company. But after the point of the match, if you have enough money to fully fund the Roth 401k, 403b or TSP and fully fund a Roth IRA, I want you to do that. If you do not have enough money to fund a Roth IRA fully after the point of the match, I want you to stop contributing to your 401k, 403b, or TSP and contribute to the max or up to the max in a Roth IRA. A Roth IRA is 10 times better a retirement account than any Roth 401k, Roth 403b, or Roth TSP after the point of the match, do you hear me? But because it is so good, there are income limitations that you have got to meet to be able to open up a Roth IRA.And what Nadine is saying here is that she and her husband make too much money to qualify for a Roth IRA, so they are trying to do anything to get their adjusted gross income down. So, two things you need to know. If you are married, filing jointly, in order to contribute the maximum to a Roth IRA, which is $6000 if you are under 50 or $7000 if you are 50 or older. You cannot make more than $196,000 of adjusted gross income. If you are single, you cannot make more than $124,000 of adjusted gross income to put in the max. Again, you may have a 401k of any kind, a 403b, a TSP of any kind, and a Roth IRA at the same time, do you hear me?But now what I want to do is I want to take you to Suze School to explain to you exactly what is adjusted gross income because it is that number that qualifies you to have a Roth IRA or not in your mind. And what Nadine is trying to do is to do everything she can, again, to make her adjusted gross income be less so she can qualify for the Roth. So, let's first talk about what is gross income so that you can then understand what is your adjusted gross income is. Obviously, we are adjusting your gross income, number one. Your gross income is essentially what you earned during the calendar year, but it's not just what you earned. It also includes your interest on your accounts like your savings accounts, tips, taxable social security benefits, income from rental properties, dividends, capital gains, royalties, even income from your retirement accounts, as well as alimony that you may receive. Got that? Now, some of the income that is not included as gross income is the income on tax-exempt local and state bonds. But to figure out your adjusted gross income, we have to adjust your gross income and subtract from your gross income. So, deduct from your gross income contributions to a deductible retirement account such as a 401k, a 403b, a TSP, an IRA.So, let me just give you an example. We have Nadine and her husband, and let's just say that their gross income is $200,000 which then excludes them from being able to contribute the max to a Roth IRA. Because, again, to contribute the max to a Roth IRA, your adjusted gross income cannot be above $196,000 to put in the maximum amount. So now they want to get their gross income down. All they would have to do is put in essentially, let's just say $10,000 into a 401k, into a retirement account, because then that $10,000 would come off of their gross income. And if they're gross income is $200,000 and they put $10,000 in a retirement account, that comes off of it and now they're adjusted gross income is $190,000 which allows them to qualify for a Roth IRA.And so many times, all of you are trying to figure out how much money can you put into your retirement accounts in order to qualify for a Roth IRA. Now it's not just money that you can deduct from the gross income that you put into a retirement account. You can also deduct any alimony that you paid interest on, student loans, certain qualified medical expenses, early withdrawal penalties on savings accounts, educator expenses, 50% of the self-employment tax, self-employed health insurance premiums, and qualifying tuition and fees paid by students. So there many things, and you can just look it up, but this gives you an idea.And what Nadine is asking, as years go on, what happens when she no longer qualifies for a Roth IRA because she's maxed out her 401ks, she's done everything possible. What can she do as time goes on? As I have told you many, many, many times, there is something known as a backdoor Roth IRA. And you can do a backdoor Roth IRA, which simply means if you make too much money to qualify for a Roth IRA and you do not want to go through all the shenanigans that you're going through to get into a Roth, to qualify for a Roth. Then all you have to do is the following. You open up a nondeductible IRA and you convert it to a Roth IRA because there are no income limitations on conversions. If you put money in a non-deductible IRA, even if you're making $10 million a year, you can convert it to a Roth IRA, and that's how you get money in a Roth IRA.But here's what you have got to know. You would only do a backdoor Roth IRA if you do not have any traditional IRAs, simple IRAs, IRA rollovers, or Sep IRAs. And the reason is this. If you do a backdoor Roth IRA and you have other IRAs out there that have money in it, they are going to tax you according to a pro-rata formula, and it becomes very, very complicated, and then it doesn't really make sense to do it, in my opinion. And that's when If you really wanted a Roth IRA, you would do everything possible by funding a 401k and all of these things to get your adjusted gross income down.If you cannot qualify for a backdoor Roth IRA because you have other traditional IRA accounts and you make too much money, who cares? Just simply open up investment accounts at a brokerage firm, at a discount brokerage firm, and just simply invest your money. Because remember, when you invest your money, the bulk of my money is not in a retirement account. It is in an investment account where I buy stock, I sell stock, I do all these things and mainly I keep stocks for years and years, and the entire time I am keeping them I don't pay taxes on it. And when I go to sell it, so, I pay capital gains tax, I don't care. Or, I get to sell things that I made a mistake on and take a loss. Or, if I were to leave that money to my beneficiaries and let's say it has increased tremendously in value, then when they get it so they get a step-up in basis and they do not have to pay income tax on it, just like a Roth IRA. So don't go freaking out, everybody if you can't qualify for a Roth IRA.The next question is from Linda, and Linda says, hi, Suze. Is there any advantage to rolling over a traditional 401k from a former employer into my new employer's 401k, as opposed to rolling it into an individual traditional IRA?That's interesting timing for this question. Linda, listen to me. I just went through this very long and boring, probably, explanation of if you make too much money to qualify for a Roth IRA because your adjusted gross income is too high, the only way it makes sense to do a backdoor Roth IRA is to not have any individual traditional IRAs, Sep IRAs, IRA rollovers, any of that, then it makes sense, and you can do it.So if you make a lot of money, you make over the adjusted gross income level of what you need to qualify for a Roth IRA, then you would be better off to just simply roll your traditional 401k from your former employer into your new employer's 401k plan, because then it's not going to count against you when you want to do a backdoor Roth IRA. If that is never going to be one of your problems, then you're better off doing a rollover into an individual traditional IRA at a discount brokerage firm. However, I just want to say, how do you know when it's going to be a problem or not? How do you know? I never in a million years thought I would be making the kind of money that I'm making, even when I started making it. So, you might just want a plan to make that kind of money if you ask me.Next question is from Jocelyn, she says, hi, Suze. I know that you are a spiritual person and I am, too. How do you know that, Jocelyn? Is that because I talk about God? Is that because I mentioned God? I don't know, but I am. I have so much faith, it's not even funny. But she says, what are your thoughts on tithing? I have never really done this before and I feel guilty about it. I barely have enough to make ends meet now, and I know that I'm supposed to have faith that once I give my first 10% there will be increase and overflow. But I guess I'm just struggling with the faith part of that. Just curious as to what advice you would offer to someone who is working on paying off debt who wants to give, but not sure as to how much. Thanks for all that you do.Jocelyn, this is really a hard one, and it brings me back to The Oprah Winfrey Show that I did, one of the 29 that I did, when a woman was on and her car was just repossessed. She had so much credit card debt it wasn't even funny. She wasn't able to feed her children, she had no money what so ever after all of her rent bills were paid, nothing. And she was not somebody who went out to eat and bought clothes. She was seriously living subsistence level, and she was tithing 10%. Yet, she couldn't afford in my opinion to tithe 10%. Now, please listen to me. For those of you who are tithing and really believe in 10%, just hear me out for a second before you all jump on me.And that's when I really started to believe that it's not about the amount of money that you're giving. Because if you have absolutely no money, I'm not sure how respectful it is for you to give money that you really do not have. Because then what you end up doing is you end up praying to God and you end up saying God, please, please, I need more money. Because really, the only time that most of us talk about God and money is when we ask him or her, or whoever you believe in, for more. So, I started to come up with this philosophy that for those of you who can barely make ends meet, sometimes it is harder for you to contribute $10 than it is for somebody who is so seriously wealthy for them to contribute a $1,000,000. So I really wanted for those who didn't have the ability really to give 10%, they should give an amount that is respectful.So, Jocelyn, you should give an amount, in my opinion, that is respectful to your situation, but not a really comfortable amount. Just make it stretch a little. If you feel that all right, you could give $20, you could somehow do that, give $25, give $30. Stretch it just a little. Because when you give, when you give from the right place, not from guilt, because remember, the three internal obstacles to wealth are fear, shame, and anger, and shame is just another form of guilt. But you have to give from the desire to say thank you, thank you for what you have as well as thank you for what you don't have. And just see how things go when you do it that way. For those of you who are listening and you have the ability to give more than 10%, give more than 10% and make up for those who feel like they can't give at least 10%. And then I would just hope that would all even out.So this woman, I'm going back to her, who had nothing. She started to do that and little by little things started to turn around. And then she was able to make money, she was able to get out of debt, and she was able to give 10% and felt great about it. So it's all up to you and how you feel about these things, but that's what I would tell you. But it is really important, no matter what, that the very first check that you write, or the very first donation or move that you make with your money at the beginning of every month is to some non-profit of your choice. Whether it's a place of worship or any other place to open up your month from a place of gratitude.Maria says, I have a simple question. When would you recommend hiring a professional wealth manager, at what point in life, at what net worth levels? What are the benefits of a professional managing my money versus me investing in low-cost index funds?So, obviously, you are asking this question because either you have attained enough money right now that you do not feel comfortable investing it yourself, or other people that you know are using wealth managers, so you're just confused as to what to do. First of all, I just want to say something. Many wealth managers will not even look at you or want to deal with you if you don't have a minimum of $250,000, $500,000, some are $5 million, $10 million and up. A really good wealth manager, in my opinion, should not care if you have $50,000, $150,000, or $150 million. They should want to help you, regardless of the money that you have. That's just what I believe, and the one finance person that I do recommend all the time, he will treat you the same whether you do have $25,000, $100,000, or $150 million or more. And I like that because you are a human being, and if you need help, they should not look at you as to how much money you have. They should look at you as what needs do you have with the money that you have, so I don't think there's an amount of wealth. Sometimes it's more important to do the right thing when you have $100,000 as it is when you have $100 million. If you have $100 million so you lose $20 million. Who cares? Do you have $100,000 and you lose half of it? Oh, it's a big deal. So that's number one. Number two, when using a wealth manager, you should never pay more than 1%, ever. One percent should be the maximum that they ever charge you and they should only charge you that money on investments that they make in the stock market. You do not want a wealth manager that charges you to buy mutual funds for you, or index funds for you, or things that you can do on your own. Also, if you buy individual bonds, they should never charge you a wealth management fee to manage individual bonds because individual bonds already have the commission built-in. So I don't have a problem if you continue to just put your money into index funds, but you might feel like you want to talk to somebody. So interview people, but if they ask you how much money you have, and you don't have enough for them, who cares about them? That's what I would tell you. All right, so that ends Ask Suze Anything for now. That was kind of a technical one, right? But, you know, it's really, really important that you know these things so that you don't make mistakes and you don't, you know, spin and spin and spin to do something that just might be really simple to do. All right, everybody, until next week, 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. 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