401k, Employee Benefits, IRA, Retirement, Roth
September 12, 2019
Listen to Podcast Episode:
In this podcast of Ask Suze Anything, Suze gives us an update on how she and KT faired during Hurricane Dorian. Then, she answers questions from Women & Money listeners: Tiffany, Liz, and Erica.
Podcast Transcript:Welcome to another edition of Ask Suze anything. And yes, you are asking me, and asking me and asking me. Am I OK? How did I make out with the hurricane? Is Suze and KT's house OK? How are you, Suze? So before I answer your financial questions today, let me at least answer or address your concerns about me, my home, the island, and everything.Obviously, since I'm recording this and I'm recording it while I'm on the island that I live on, we are OK. The storm came in and it happened to at the last moment veer more north. And so it missed us. But even though it missed us and we had some heavy winds on the island that I live on, the workers of this island all happened to have families and they live in Freeport. And they left this island to go to Freeport to be with their families because they did not want their families to be alone. They not only went to Freeport, they went to the Abacos, they went to Nassau, and yes, some even went to Marsh. I can tell you that what those people have been through, I don't even have words to tell you the stories that they're coming back here with. Obviously, Marsh Harbor was totally destroyed. The Abacos was totally destroyed. Freeport, some areas were totally destroyed, not as badly, however, but they don't have food, they don't have water. And we have now brought many of the families with the workers back to this island. But what's very fascinating about it is even though they're safe and sound here, they have water, they have food, this is not where they want to be. They're all saying, please, can we go back and be with the people we know? We want to go back to our islands and we're all like, but you don't have anything on those islands. You don't have food, you don't have water, you don't have electricity, and they all say to me, but Suze, we have our family. So they will get to do what they want to do.But I've learned so much from this storm I can't even tell you. I've learned that there's a group of people known as the Bahamians that no matter what happens to them, they do not lose their faith in God. They believe that this was a blessing somehow, that somehow they will get through this, they will all gather together and everything will be fine. And what's interesting about it is that I've been posting on my Facebook page and I've been posting on my Instagram and Twitter, and a few of you have answered, although I've deleted them right away, so you might not have seen them, if you follow me. "There's no God. If there was a god, why would he let this happen?" And blah blah, blah. And I'm sitting there thinking to myself, oh, great, here are people who didn't even go through this commenting, but yet the people who went through it and saw people die, again, the most horrific stories I've ever heard. They still haven't lost their faith and their spirit. And that's great, I love that. For me and for all the concern that all of you had for me, I thank you very much, but I have to tell you, there's a tremendous difference between me and all these people that have lost everything. Even if I had lost the island, lost my home, lost my other home in Florida. Really, everybody, it would have been fine because I have the financial resources to recover and go where we need to go, to evacuate and to be OK. Not these people. They don't have money, they didn't have $150 to take a flight out where they could have evacuated. That was a huge amount for them, so they had no choice but to risk their lives and many of them, and I mean many of them, lost their lives. There are very few people who don't know one, two, three or four of their relatives that did not perish in this storm.So, money is really important. Money isn't just there to buy you the things that you need or want. It's also there to protect you in case you need to leave, in case you need to get out, in case something happens. And it's not just in the Bahamas, it can happen anywhere. Fires, tornadoes, floods, earthquakes, they all can happen. And again, that's why this podcast is so seriously important. It's important because once again, it's not just about which stocks should you buy. What should you do here? How should...? I wanted to give you the energy, the incentive, the desire for you to be able to survive any single circumstance that comes your way. And I don't want you to just survive, I do want you to thrive, I want you to be fine, no matter what happens to you. Because you don't want to ever have to go through what over 70,000 people now in the Bahamas are going through. Do I think some of these islands will come back? Truthfully, I don't. Do I think, however, everybody will be OK? I do because they have faith that everything happens for the best.All right, so now you know that I'm OK. However, I am going to have one change on things. I've been telling you that on September 29th at 1 a.m. on HSN I would be doing an Ask Suze Live and answering all your questions. Because, truthfully, I am so involved right now in the recovery efforts here in the Bahamas, I've scrapped that idea, and I'm just gonna do a regular show with the protection portfolio and blah, blah, blah. So accept my apologies for that. I know a lot of you wrote in, but a lot has changed in my life and the lives of those that I love, and so that's really where my energy is going right now.You're also asking me, where can you contribute? How can you help? There are many ways that you can help, but one way is you could go to www.flytropic.com. That's www.flytropic.com. At the very top of the page, it will say the relief effort for Hurricane Dorian. Click there, and if you want to send in contributions, that is where I personally have contributed to, financially speaking. There are others that I've done as well, but I know these two organizations and I have no hesitation at all saying those both places that you're going to read about there; Blue Tide as well as Discovery, fabulous places if you want to send in contributions.So let's begin Ask Suze Anything. If you do want to ask me anything, all you have to do is send in a question to AskSuzePodcast@gmail.com, S-U-Z-E. And if I choose that email, I will answer it on the air. All right, let's begin. Before I had to evacuate, I did promise Tanya that on the September 5th show I would answer her question in more detail. Since obviously, I wasn't able to do that, I'm going to do it now. Tanya says, I've been learning so much from you. I have a question about how to save for retirement when your employer doesn't offer matching contributions. My husband and I are in our early thirties, and we each have Roth IRAs to which we're making the maximum annual contribution. Good on you, Tanya, good on you. His job offers a 403b as well, but without matching and without a Roth option. My question is, should he still be contributing to this 403b? Thank you for any input that you may have.So here's what I would say to you. I know, Tanya, that you think that a 403b which is, by the way, a retirement account for a nonprofit, like you're a teacher, you happen to be in a hospital or hospital worker, whatever it is. That to get the tax write off today, you should absolutely do that. But I just don't believe that's true. If your company does not match and it does not offer a Roth option, I think you might actually be better besides just the Roth IRAs that you're both doing, besides doing a regular retirement account that isn't a Roth option, like the 403b, to go to any discount brokerage firm. And do what? Open up an investment account. Now when you are buying things and let's say you're buying an index fund or you're buying good quality stocks or mutual funds, or whatever it is that you're buying. When you buy them, they also, by the way, grow tax-deferred. So, you buy something at 10 and now it goes to 20, and now it goes to 30, and now it goes to 40, you do not pay taxes on that. You don't pay taxes until you sell. And the truth is, most of the time, when something is good you don't sell for years and years to come. But if you buy something and it's going up and it's going up and you have held it for more than a year and you do sell, you're only going to pay capital gains tax on it. When you put money in a traditional 403b or an IRA or 401k, that's a pretax one. And yes, your money is deferred, and, yes, you got a tax write off.As time goes on and your money is growing, and growing, and growing,you cannot take that money out until you're at least 59 a half years of age in any way that you want. And when you do take it out, you're gonna pay ordinary income tax on whatever amount you do take out. And that will be dependent on what tax brackets are at that time. Oh, you don't want to take anything out? Well, you're going have to by April 1st after the year you turn 70 and a half, you are going to have to start taking required minimum distributions from the IRA, the 403b, the 401k. If you die with this money and it then passes down to your beneficiaries, they're going to have to start to withdraw it, and they will have to pay ordinary income tax according to what their tax bracket is at that time. And now what if you didn't need this money and now it passes down to your children and they're in a really high tax bracket? If you simply did a regular investment account, you put in $5000, $10,000, you can put in any amount of money you want. You can let it stay in there for as long as you want, and you can take it out at any age that you want without penalty, as long as it's in there for at least a year. Like I said before, you're only going to pay capital gains tax on it. If you never take it out, and when you die and it passes down to your kids or your beneficiaries, they get a step up in cost basis, which means its value to them as of your day of death or six months from it. If they sell it at that time, guess what? They don't pay any income tax on it at all.And there's another reason that I like investment accounts over retirement accounts that do not match or are not Roth retirement accounts. And it's this: You have your money in a retirement account, you invested, and let's say you bought these stocks. And for whatever reason, the stocks that you purchased went down and down and down, and they never recovered. You invested 10, 20, 30, 40, even more, $50,000. That $50,000 is now worth $3000. Because it is in a retirement account you do not get to take that off your taxes. If you had invested that in a regular investment account and it went from $50,000 to $40,000 to $30,000 and now you sell. That is a tax loss for you that you could use to offset maybe some gains that you have in your portfolio as well. So there is so much more flexibility that you have in investment accounts that are taxable on a capital gains basis if you hold it for one year or longer, that you and your family can get a step up in basis, there are all kinds of advantages. So don't get so stuck on the only way to invest for retirement is in a retirement account. Wrong.The majority of my money, the majority of it, probably 95% of it, is in regular investment accounts. So, therefore, why don't you just do what I do? It seems to have worked for me. So let me try to be perfectly clear on the exact steps that all of you should take. Number one. If you work for an employer that offers you an employer-sponsored retirement plan, which would be, a 401k, or 403b, a TSP, whatever it is, and they match your contribution, you put in a dollar, they give you 50 cents, or whatever it may be. I don't care if it's a traditional or a Roth, you cannot pass it up. What I would love to see is that they offer a Roth. You put your contributions into the Roth up to the point of the match, they then will put their contribution or the match in the traditional retirement account that they have. But your money is going to the Roth employer-sponsored plan. If they don't offer a Roth, I don't care, put it in the traditional employer-sponsored plan and get the match. After the point of the match, if they do not offer a Roth, then you should open, if you qualify, a Roth IRA and max it out there. Who qualifies? If you are earning under $122,000 a year of adjusted gross income and you are single, you then qualify for a full $6000 if you are under 50. Or $7000 if you are 50 or older for the year 2019.If you are married filing jointly, you qualify for a full contribution if you are making under $193,000 a year of adjusted gross income. If you are married, filing separately, big mistake because all you could make is $10,000 a year then of adjusted gross income to qualify for a Roth IRA.Are we clear on that so far? If you work for a corporation and they do not offer an employer-sponsored plan that is a Roth 401k or a Roth whatever and they do not match, then you are better off just doing a Roth IRA if you qualify and then an investment account. OK? If you don't qualify for a Roth IRA because you make too much money, you can look into doing a backdoor Roth IRA. Listen to my other podcasts that I talk about it. But if you don't want to do that for whatever reason, you can always then just do an investment account. Am I clear?So those are essentially your options. It's really not that complicated. If you work for an employer that offers a Roth 401k, and you just feel comfortable putting your money in the Roth 401k, even though they do not match, I don't have a problem with that either. Do I think that a Roth IRA is better than a Roth 401k? I do. However, the goal here is for you to save money for retirement in a way that is the most tax-efficient way to do so. And a Roth is the most tax-efficient way to do it. Yes, I'm asking you to give up the tax write off today that you might get in a traditional IRA or a traditional 401k. I don't care about that tax write off, and the reason I don't is because you just waste that money and spend it on something that you don't even need or probably even want in the future. So I want you to protect yourself in the future against rising taxes, which I think will happen and have access to all your money tax-free when you are older. So that's kind of the way that I want you to do it. It's really just that simple.All right, since I'm doing questions or the last question was on a Roth IRA, let me stick on this topic for just a little, because I've gotten so many questions from you about Roth retirement accounts. This one's from Liz, she says, hi, Suze. If my company offers a Roth 401k but does not contribute to it at all, that means it does not match, is it worth doing, or would I be better off just funding my own Roth IRA? Liz, if your employer does not match your contribution, I would rather see you open up a Roth IRA at a discount brokerage firm before you did a Roth 401k. And why is that? That is because with a Roth IRA you can withdraw your money that you put in at any time without taxes or penalties, what so ever. It's the growth on your Roth IRA that has to stay in there till you're at least 59 a half years of age, and the account has got to have been open for a least five years. After that point, you can take it all out tax-free. That is not how a Roth 401k plan works. So in priority, you first do your Roth IRA. Once you have maxed that out, which would be $6000 if you're under 50, $7000 if you're 50 or older, this is for the year 2019. If you've maxed that out and you now want more money that you want to invest, then I don't have a problem with you putting it into a Roth 401k, even though they do not match. So that's my answer there.Next. This one's from Erica and Erica is showing me that you are still confused about the difference between Roth 401ks, 403bs, 457s, all of those and a Roth IRA. She says that her husband is offered a Roth contribution at the place that he works and blah, blah, blah, blah. So here's what she's telling me that she has been told. Listen carefully. Roth contributions, this is in quotes, "Roth contributions are made on an after-tax basis and do not reduce your taxable income for the year." Yes, she says, we get that. However, Roth contributions and associated earnings can be withdrawn tax-free if five years have passed since January 1st of the year of your first Roth contribution, and you're at least 59 a half years of age or older. And then she goes on to say, this sounds a bit different from how you always describe Roth IRAs. As I understand it, you can use any Roth contributions at any time without taxes or penalties. She then says, would we just be better off opening our own Roth IRA? Thanks much.So, Erica, once again, please know that there is a difference between a Roth IRA, as I've been explaining in this podcast and a Roth 401k or Roth 403b or a Roth 457. OK? A Roth IRA, bar none, is the best investment vehicle you can have besides a health savings account, by the way. But anyway, bar none, is the best retirement account out there.So again, the rules for a Roth IRA is that any money that you originally put in, your contributions, the $6000 this year, the $6000 next year, or, if you're 50 and older, the $7000, the $7000? Whatever it is, any amount of money that you put in, you can withdraw at any time without taxes or penalties, regardless of your age, or how long that money has been in there. So it's liquid to you, you can get it back, no taxes, no penalties, it does not matter. It is the earnings on that money. You put in $6000 this year, $6000 next year, $6000 the year after that. You put in $18,000, that $18,000 has grown over the next three years to what, to $20,000? You can take out any amount of money you want up to that $18,000 that you put in, regardless of how long that money's been in there or your age. It is the $2000 of growth that you cannot touch, penalty and tax-free until that account has been open for at least five years and until you're at least 59 a half years of age, that is how a Roth IRA works. That is not how a Roth 401k, a Roth 403b, a Roth TSA, a Roth 457, none of those work that way, so there is a big difference between the two. The others, you have got to keep your money in there till you're at least 59 a half. There's all of these rules and regulations even when you take money from there and roll it over into a Roth IRA.So just know there is a big, big difference. So once again now, I just want to thank all of you for your concern. As I sit here and record this, I have been told that there's a 50% chance of another hurricane coming this way and developing and there's a few more out there. So in the same way, I have to be prepared for what Mother Nature may deal me. You have to be prepared for what the financial mother of all can deal you. And you can be your own financial mother, where you are strong, safe and secure women. I know you can do it, I know you have what it takes, so let's just do it. 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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