Podcast Episode - Ask Suze Anything

Credit Cards, Credit Union, Debt, Roth, Roth IRA, Taxes

July 02, 2020

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Podcast Transcript:

July 2, 2020. Suze O. here and welcome to the Women and Money podcast, as well as the men smart enough to listen. So today is Ask Suze Anything, and this is where you can write in and ask a question, and you do so on the Women and Money app. To get the Women and Money app, all you have to do is go to Apple Apps or Google Play, search for Suze Orman, and you will download it, and you can ask your question there and, if chosen, I'll answer it on the podcast. However, I've noticed, as I've been going through a lot of these questions, that many of them I have answered in one form or another in a previous podcast. So, why not just use the app and go to where it says "search past podcasts" and to do so you just click on it and then you put in the topic that you want to know about and up will come all the podcast that I've addressed, the topic that you're interested in knowing about. You can also read it in transcript form right there. So, you might want to take advantage of that. All right, everybody, let's start with Joann and she says, I am 71 years old. Is it worthwhile to refinance a home I bought seven months ago? The current interest rate is 4.125% for 30 years and the refinance rate is 2.75% for 15 years. Total savings would be $86k over the life of the loan. Is this a wise move? Guess what, Joann? You betcha it is. You know, everybody, I get that maybe you've just bought a home a few months ago or you refinanced a home a few months ago. You really need to look at what the current interest rate environment is at this point because it has dropped dramatically. And if you can save 2% on a refinance, 1.5% on a refinance, 1% on a refinance, especially if you are reducing the length of the loan from 30 years to 15 years and you know you are going to stay in that house long enough to recoup in the amount of money that you're saving every month on the mortgage payment. So, you're going to recoup in that savings what it cost you to refinance, then go ahead and do so. All of you should always remember, however, that a 15-year mortgage is always half a percent less than a 30-year mortgage. So do not get a 30-year mortgage with the intention of paying it off in 15 years, that makes absolutely no sense what so ever. The next one is from Riley. She says hi, Suze. What's your opinion of doing a cash-out refinance to help pay off credit card debt and to pay the I.R.S. for a huge 2019 tax bill? Surprise. (Why do we all think she was surprised by a huge tax bill?) Anyway, I am a 39-year-old female, married, no kids, and we own our house. I'm employed, but my husband isn't due to being in recovery from medical issues. Thank you. Riley, I love that you own your home outright, and I'm assuming that's what you mean when you say we own our house. But you're employed, your husband isn't because he's recovering from a medical issue, but you're just assuming that nothing could happen to you? So you're about to ask me if I should allow you to take unsecured debt, such as credit card debt, and pay it off with secure debt, which is money that you would take out of your home. And the answer to that is you are so denied I can't even tell you! And the reason is very simple. If you can't pay your credit card debt, what are they going to do to you? Are they going to garnish your wages? What are they going to do? And so I really think it's important that either you leave the credit card debt just like it is, or you go to www.NFCC.org and see if they can negotiate a five-year payment plan for you. But also, I don't want you to do anything with your home at this point in time. Call the I.R.S. and see if you could negotiate something with them. We are in COVID times, girlfriend, and this is not the time to give up the luxury of owning your own home outright. So no, I don't want you to do that. Got that? All right, this one is from Mary, and she says, Suze, I received an extremely large inheritance about three years ago in nearly all municipal bonds issued in both Colorado and Florida, which includes colleges, airports, cities, and recreation districts. All the bonds I hold are highly rated. I check in with my broker weekly, and he says, staying the course is the right plan. Even if I wanted to, I do not think I could sell the bonds on the secondary market without losing a great deal of money. My question is, how are all these municipalities who have no income, paying interest to me and others and not default on their bonds? If I try to sell the bonds, I believe I will lose a great deal of value. But I am going to lose all the money I have in these bonds do to the economic shutdown. All right, listen to me, Mary. How do you know that you are going to lose money in these bonds if you sell them? In previous podcasts, I've explained to you when interest rates go down, the value of bonds goes up. And when interest rates go up, the value of bonds goes down. So, have you checked? Have you asked your financial advisor if you were to sell these bonds right now, how much would you get for them? Because if they're making you nervous, which they obviously are, and the goal of money is to make you feel secure, it seems to me that these bonds are making you feel really, really insecure. Now, most good brokerage firms, and hopefully you're dealing with a good brokerage firm, they have a bond department and they will tell you, are these bonds in danger? Do they think they're still OK and what's going on? Also, you don't have to be what I call an all or nothing investor, where you do all of something with your money or nothing with it. So you could go through these bonds because you said it's an extremely large inheritance. You could go through these bonds one by one with your financial advisor, and he or she would tell you exactly you bought it for this, this is what it's paying you in interest, this is what you could sell it for right now. And then you could make a decision as some of these may be just fine. You know, you have a lot of what's called revenue bonds, which obviously pay you based on the revenue that that entity happens to make. If it's a municipality, then you know it's usually called a general obligation bond, which is backed by the taxing authority of that municipality. So I really want you to just slow down here, right? And just find out from your financial advisor if in fact have you lost money on these bonds, have you made money on these bonds, or would you break even on these bonds? And then I would make a decision from there, but not where you think that you've lost money. You need to know, all right, that's what I would tell you. All right. Next is Joelle. She says, hi, Suze, here's my question. I'm a single parent who paid for my daughter to go to college. During her last year of college, in 2019, I took out a HELOC to cover expenses: hers, mine, household repairs, etcetera. My daughter has graduated from college and started working, and I received my tax refund recently. As a result, I have extra money accumulating in my checking account, and my balance available right now is $21k. My question is, should I use several thousand dollars of this money to pay down the HELOC balance since I'm paying roughly 5% interest on that money? My thought is that, if needed, I can always withdraw from this account in the future. But I don't like paying interest when that rate far exceeds the rate I would get with the money just sitting there in my emergency fund. So, girlfriend, I have to tell you, that's exactly what I would do. I know that over all of these podcasts I've been saying to you, keep the cash, keep the cash, keep the cash. But, that's when I'm talking about paying down credit cards. Paying down credit cards is different than paying down a HELOC, which stands for home equity line of credit. And why is that? Because, Joelle, if you paid down that balance at 5%, which is really high, and you're only making 1% if you're lucky, wherever it's sitting, you've just made yourself 4% a year on that money. And because it's a HELOC it just stays open. So, if you need that money, if you get yourself in trouble, you can just write a check, again, just like you did to pay for your daughter's college education. So, you betcha I would use your available cash to pay off that HELOC. Right, this next one is from Gary and it is, hi Suze, it's an honor to contact you. You have been my only financial advisor and I have followed your advice for over a decade. Eight years ago, I purchased about $3500 of Netflix stock (you are a smart man, Gary), and I have not touched it since. And as of today, at the close of the market, it is worth $82,345.90, an increase of over 2250%. Boy, was I lucky? I only own one other stock, but I'm so nervous that this stock portfolio is not at all diversified. How would you recommend I go about diversifying? I am not someone that trades stocks regularly or understands it fully. I would love your advice. Until then, I will continue to Netflix. Stay safe. So, Gary. When you wrote in, you had $82k approximately in Netflix stock and you were willing to diversify some of it. But you weren't going to do anything until you heard from me. And all right, so now you're hearing from me. Today, you have $126k approximately in Netflix stock. That is $44k more than you had just like, you know, two months ago. That is a tremendous increase, that's like a 50% increase. So, here's what I would do. If you were happy with taking $3500 to $82k, you have to be thrilled with taking $3500 to $126k. I would sell... You have approximately 261 shares of this stock. I would sell 90 shares, 90 shares at $486 which is what it closed at last night, which is approximately $44k. That is the difference between when you wrote in and what it is right now. Take $44k off the table. You're still going to have a lot of Netflix stock, and then that $44k you could possibly invest in other things. There are so many fabulous stocks out there. Something caused you to buy Netflix. There's got to be something else that you really like out there, and again with Charles Schwab as well as Robin Hood, where all of you can buy fractional shares of stock. So, all of you, could you know, create such an incredible portfolio of one share, two shares, three shares. Because, you know, look at what happened to Gary. So, Gary, if I were you, that is what I would do. All right this next question isn't from just somebody, it's from a lot of you. And it's a lot of you that have taken out the Paycheck Protection Program loans, and you now are all writing me and saying, Suze, nobody has been able to answer this question for me. Now that the PPP program has extended it from eight weeks to 24 weeks, does that mean that if I have an employee that wants to continue to collect unemployment, that I can let them collect unemployment and then rehire them back and then qualify still? And so, I just want to go over the Paycheck Protection Program for many of you out there who took out this type of loan. So, here's what you need to understand, really, is that now it's just been passed that the PPP loans run for 24 weeks. Like I said before previously, they were just for eight weeks. So, now you still have time to figure this out, to get this loan forgiven. All right? The law extends the deadline to rehire workers to December 31 for those companies that want to qualify for loan forgiveness. So, absolutely, if you have employees that are still on unemployment, you have until December 31 to hire them back. Also with this law, and trust me, everybody, this law has been so confusing. Right, in order to be eligible for forgiveness, and all of you listening don't understand what I'm talking about because they still may open up the PPP program because there's still a whole lot of money in there to be given out, even though they've shut it down right now, they're thinking about opening it up and again. The PPP, the Payment Protection Program, is for small businesses or gig workers or whatever it is who need money, and they can take out this money and it's normally used to be at a 4% interest rate. Currently, just so you know, it's now only at 1%, it's not at 4%. So you pay a small interest on this money. But if you use this money to rehire workers, or 60% of what you borrow to rehire workers, then it's forgiven. It's a grant, and you don't have to pay it back. Now, if you don't meet those qualifications, all right, you can pay it back but the interest rate now has been lowered, everybody, to 1%. And you can take up to five years to repay that loan because the old version was you had to pay it back in two years, so that is a really big deal. Listen, one other thing you need to know about the new law for PPP, you know the old one is you had to hire or rehire your employees within a set period of time. The new law has a lot more lenient regulations to it, so you should look into this. With the new PPP, the new law governing it now, the main thing all of you wanted to know is, do I have to rehire my workers right away? And the answer is no, you have now until December 31, the end of this year, to do so. That is the answer to this question that so, so, so many of you have been writing in about. All right, let's go to Eileen. And Eileen says, I recently accepted a lump sum payout from a former employer's pension. I took the lump sum in a trustee transfer. I was planning to roll it into a traditional IRA. I do not meet the income limits to open a Roth. Can I put the money into the traditional IRA and within the same day converted to a Roth and not have to owe taxes? Is this what's called a backdoor Roth? All right, girlfriend, listen. No, this is not what's called a backdoor Roth. And there is no way that you can get around paying taxes on this money if you convert it to a Roth. The correct terminology, Eileen, is that you have this money and you do an IRA rollover with it. You transfer it into an account where rollovers from your employer's pension or 401k into your own IRA rollover account. Now, it's in there and it's a traditional one because you've gone from pre-tax to pre-tax. Now, if you want, and you can do this that day, you can convert whatever amount of money you want into a Roth IRA because there are no income limitations on a converted Roth, they're only income limitations on a contributory Roth. Again, I ask all of you to go back and search via the app where you can search podcasts, and there are podcast galore on this one topic. The difference between a contributory Roth and a converted Roth. So, there are income limitations on a contributory Roth, which means you contribute money every year to it. There are no income limitations on a converted Roth, which means you are converting some of it or all of it from pre-taxed retirement accounts into an after-tax retirement account. But you will owe ordinary income taxes on that, no matter what. Got that? So, just to answer your question, also briefly about a backdoor Roth IRA. A backdoor Roth IRA is when you do not qualify income-wise for a contributory Roth IRA, and so there are income qualifications, and they are as follows. Actually, you have until July 15 of this year to fund a contributory Roth for the year 2019. And if you wanted to do that, your adjusted gross income limitations would be for a single would be $122k a year of adjusted gross income to contribute the max, which is what? It is $6k if you're under 50, $7k if you are 50 or older. Once you have reached $137k of adjusted gross income as an individual, you no longer qualify for a Roth at all. All right, everybody? So between $124k and $137k, the max starts to go down until you make more than $137k of adjusted gross income, and then it goes away. That amount is $193k for a married filing jointly or a max of $203k, and then you no longer qualify. That's for 2019. For 2020, it's $124k to $139k of adjusted gross income for singles and $196k to $206k for married filing jointly. So if you wanted to, if you made within those AGI (adjusted gross income) limits, you could open up a contributory Roth. If you make more than that, you can do what's called a backdoor Roth, where you open up a traditional IRA, you make it nondeductible, and then you convert into the Roth. However, it is a little bit more complicated than that, so do not do that until you have listened to all the podcasts that I have done on backdoor Roths because you might just get yourself in trouble if you don't understand what you are doing. And one last one here from Tanya, she says, you recommend that we acquire eight months of expenses in our savings account. But what if you have credit card debt or maybe student loans? Do you suggest to focus on paying those off first before building the savings? Or should we pay the minimums and focus on building the savings accounts? Now, obviously, I have answered this question over and over and over again. But it's really important because so many of you have this question right now and I don't know that you're going to listen to a past podcast. Maybe you'll only listen to this one and you'll never listen to another one, so it's important that I go over this again and again. At this point in time, where we are with COVID, your main course of action is to build an eight-month emergency fund. It is not to pay down your credit card debts or your other bills. It is to pay the minimum payments due and get yourself an eight-month emergency fund. So, rather than using that money to pay down bills, use that money to pay the minimum and save the rest. I'm going to say that every single time I'm asked this question until there is a vaccine that works for COVID. Got that everybody? In two days, it's going to be July 4th. So from my heart to all of you, I wish you a very, very happy Independence Day. Hi, I'm Sarah, and I'm Robert, and we're from Suze Orman's Women and Money podcast team here to tell you that Alloya's member credit unions are so proud to have brought you this episode. You know, Robert, credit units live by people helping people philosophy. Absolutely, Sarah. And that means when you bank with a credit union, you can trust that they have your best interest at heart. The fact is, regardless of circumstance, a credit union will have your back and keep your money safe, that's the credit union promise. Go to www.MyCreditUnion.gov to find a credit union that fits your needs. That's MyCreditUnion.gov. Hi, I'm Sarah, and I'm Robert, and we're from Suze Orman's Women and Money podcast team here to tell you that Alloya's member credit unions are so proud to have brought you this episode. You know, Robert, credit unions live by people helping people philosophy. Absolutely, Sarah. And that means when you bank with a credit union, you can trust that they have your best interest at heart. The fact is, regardless of circumstance, a credit union will have your back and keep your money safe, that's the credit union promise. Go to www.MyCreditUnion.gov to find a credit union that fits your needs. That's MyCreditUnion.gov.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.

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