401k, Credit Cards, Employee Benefits, ETFs, Mutual Funds, Taxes, Trust, Will
September 19, 2019
Listen to Podcast Episode:
In this Ask Suze Anything podcast, Suze talks about mistakes you can’t afford to make. She answers questions from Women & Money listeners Sarah, Jill, Joann, Menni, and Gavaris.
It's another Ask Suze Anything. Today's Ask Suze Anything is about mistakes you can't afford to make because you just tend to do things with your money, or take actions with your assets, before you even ask, or know if you should or should not. And I'm inundated this week by questions of no, don't do that or, no, you'll see one with Joann. No, I can't believe you did that, that's a mistake. So that's what today's Ask Suze Anything is going to be about. And if you want to ask a question, all you have to do is send in an email to AskSuzePodcast@gmail.com. You should know how I spell my name by now, S-U-Z-E. And if I choose it, I will answer it on this podcast. Soon, very soon, my app will be finished. It got postponed a little because of this hurricane that we went through. And as I do this podcast, there's another one out there, I can't believe it, but it's all right, it's OK, I'm just going to deal with it. But, so soon you'll be able to see all the questions that come in, you'll be able to see the ones that I do answer online, you'll be able to do so many things. I hope you participate in it. But I'll tell you more about that when it is absolutely ready.The very first one today is from Sarah. She says, Hi, Suze. I've been listening to your podcasts, and I'm going back starting from the beginning. Now, Sarah, that is a good idea. You know, the other day I was talking to my niece Alexis, and she was telling me how she had listened to the Money Mind podcast that I did just a few days ago, and that it was her favorite podcast out of all the podcasts I've ever done. And I asked her, I said, have you listened to all 70 of them? Now notice she did not answer, it was like, Suze, I'm giving you a compliment, can't you just say thank you Alexis, that's very kind of you? But it's true, there are so many great ones. Some are greater than others, some are just great. Of course, I would think that, but it isn't bad to go back and listen to every single one of them. Just go through them all, and then you'll be able to decide for yourself.One in particular, Sarah says, was very timely. My mother-in-law contacted my husband about considering having his and his sister's names put on her house in the event something happens to her to avoid delays. Now, before I just go on here, in the event something happens to her. It's not if you're going to die, it's when you're going to die. Something is going to happen sometime in your life, and you have to be prepared for that no matter when it happens. Just saying.Anyway, she asked to consider it and get back to her. He came to me with this and we agreed that we need to do our homework to make sure we weren't setting us up for failure. I've learned from your podcast that my mother-in-law needs a trust. And I'm going to talk to her about all of her essential documents in order to really make things simpler, especially if she were to be incapacitated. We will be approaching her with this information when we have all our facts and figures. If you have not listened to the podcast about why you need a living revocable trust, the must-have documents everybody, I suggest that you all do so.But here is her question. My questions are, what does this mean for my husband and me if his name is on it? What would we be responsible for regarding the house? Also, my husband and his sister are estranged. If his name is on the house with his sister, does any of that make him liable for anything related to his sister, financially? That is Sarah's question.All right, Sarah, listen, if your mother-in-law was to simply put your husband and his estranged sister on the title off her home as joint tenancy with right of survivorship, upon her death that house is going to go to both of them. If they want to sell it, they both have to agree on selling it, they both have to agree on the price to offer it for, so that is not a good situation on any level. Also, as I have said in previous podcasts, that if your name goes on the title to the house with your parent, they gift it to you, then you have to make sure that they're not also gifting to you their costs basis on the house, so that therefore, when they die you don't get a step-up in cost basis on the house, and then you have to pay taxes on it, depending on how much it has appreciated. So, if you do any of that, you better do it right. You are correct, it is far better to have the house owned in a living revocable trust left to both your husband and his estranged sister. However, I would make it in the trust already what is to happen to the house upon mother-in-law's death. The house is to be sold, the assets are to be divided equally, there are to be no arguments about this. I would make it very, very clear so that your husband had very little to do with his estranged sister. That it was all laid out in the trust according to your mother in law's wishes. Does this mean that your husband is going to be related in any way to his sister financially besides the house? No.The best way to do this is to set it up in a living revocable trust left to your husband and his sister. That way you easily get a step up in cost basis and none of it is deemed a gift, it is deemed left to you upon her death. That is what I would do. However, I would make it that your husband was the only one who was able to make decisions about the house in case his mother was incapacitated. If it has to be him and his estranged sister making decisions for her, no decisions may be made, she may be left in jeopardy. So, Mommy has to decide, is it your husband or her daughter that is going to be making the decisions about incapacity and everything else?This next one is from Jill, so it's a little bit long, so I'm going to skip to where she says, hi, Suze, I'm so empowered by you and blah, blah, blah, right. She says, I'm caught up on all your podcasts, I'm loving this, and I completed your Suze School. But there's still a lot of little details and information that is not addressed in your podcasts. Question is, what is an ideal annual expense ratio for exchange-traded funds and mutual funds? Your Suze school states, 1.2% for mutual funds and 0.55% for ETFs. My greatest confusion is that throughout your podcasts and your Suze School, some of your advice has changed.So, here's what I want to say, Jill, to this. Over the years, yeah, my advice changes, which is why it's so difficult sometimes to say, do this, don't do that. Like a few years ago, I never, ever would have said to you buy certain things. I most certainly wouldn’t have told you to buy, you know, a 30-year Treasury bond versus the stock market, versus things like that. Now, I'm telling you, I don't think it's a bad idea if you can get 2% to buy a 30-year Treasury bond. So, you have to understand, if you are listening to my advice, please look at the date of that advice. Things change. In 2002, in 2001, whatever it may have been, in the late 1990s, I was saying, buy real estate, buy real estate, buy real estate. In 2006 I was telling you, sell real estate, sell real estate. Then in 2010 again, I was saying, OK, buy real estate.So, you've got to be able to be fluid with me. Also, in terms of annual expense ratios, and an annual expense ratio is how much that fund, a mutual fund or exchange-traded fund, annually charges you to manage your money. So, if that fund returns 10% you're only going to get, if they charge you 1%, 9% on your money. So, an annual expense ratio is a big deal. Hopefully, what I said, and I will go back and check it on Suze School, is that a managed mutual fund, which is very different than a passive mutual fund, a managed mutual fund is where you have a portfolio manager that is buying and selling, and he or she is the one deciding which stocks or bonds are in that portfolio. So, they usually get a portfolio management fee or the expense ratio. The most you should ever pay for a managed mutual fund is 1% to 1.2%, period. On a passive fund such as an index fund, they just buy the entire index. The truth of the matter is, you shouldn't really be paying more than 0.25% or 0%. Fidelity has no fee funds. The lower the expense ratio, the better off you are, the same with exchange-traded funds, so I hope that clears up that confusion for you.The next one is from Joann, and I've actually been emailing back and forth with Joann to tell her how to hopefully fix this mistake that she made to the best of her ability. But I want to talk about it today on Ask Suze Anything because I do not want you to ever make the mistake that Joann made.Hi, Suze. This year I left my place of employment after I was being sexually harassed by my supervisor, the school principal. After being out of work for 90 days, I was eligible to withdraw savings from my retirement funds in a state public employee retirement plan.Let’s stop there for a second. So she had her money in a retirement plan, just like you may have your money at a retirement plan at the place that you work. Got that? I will continue.I decided to withdraw this money because my employer did not match, and should I ever need it, I would never be able to withdraw or borrow from it even though it was 100% funded by me. The total saved was $46,000 and after withholding 20% for federal taxes, $37,000 was deposited into my bank account.Listen closely, everybody, because this was a serious mistake. Know that Joann is 36 years of age, and remember, as I'm reading this, that when you take money out of an employer-sponsored plan, especially if it's not a Roth of any kind, which this was not. You will pay a 10% penalty tax on it, plus that money will be added to your income this year or the year you withdrew it, as ordinary income. So, you will owe ordinary income taxes on it, and depending on the state you live in, you may have to pay a state penalty tax as well.She goes on to say, I would like to put the money into a Roth IRA and continue saving for retirement.Again, a big mistake. You cannot just put $37,000 into a Roth IRA. Maybe you could have converted it to a Roth IRA, but then you again would have owed taxes on all of it. It just would have made no sense. But here we go.She asked, what do you suggest I do with the money? What's the best way for me to save and invest it without being taxed again? I withdrew the money because I did not have another retirement account set up for a rollover.Joann, you could have set one up, but I’ll wait to give you your answer here...You should also know that I do intend to use about $10,000 of it to repair a home gifted to me by my mother, which I will advertise for rent and use as an additional source of income.All right, Joann, listen to me. But more importantly, because I've been telling you, I contacted Joann because I was so upset about this email. But I want you to listen to me. If you have money in an employer-sponsored plan and you are not at least 55 years of age or older in the year that you leave service, all right, you will have to pay a 10% penalty tax on any amount of money that you withdraw. That's number one.The way that Joanne did it is not only was she given only $37,000 and they withheld 20% for tax. She is going to owe ordinary income tax on $46,000. That's going to be added to her income this year and a 10% penalty tax on that which is $4600, and possibly a state tax as well, depending on the state that she lives in. What should Joanne have done and what can she do?First of all, she should have done a custodian to custodian transfer from where she worked, to a discount brokerage firm where she set up an IRA rollover. She said she didn't have one, she could have created one. And then the money would have gone directly from her ex-employer into her account, no withholding tax, nothing, and she would have $46,000 in her IRA rollover. She says in her email, she went on that I didn't read you, that she just got another job as a teacher. So, what she could have then done if she wanted to, is take the money and roll it from her IRA rollover into her new employer's account as well, and continued there, or just left it in the IRA rollover and little by little, convert it to a Roth IRA. What can she do now? When I asked her, when did she get this money? She said about 10 days ago.So, listen closely. If you ever make the mistake that Joann made, you have 60 days from the date that you got this check from your ex-employer to take it to a brokerage firm, or a discount brokerage firm, or a credit union, or wherever you're going to open up an IRA rollover and deposit it. Now, you have prevented paying taxes on the amount of money that is in the check. The problem is, you had in this case, Joann, $46,000 in your account. You only got a check for $37,000 because they withheld almost $10,000 for tax. If you do not get that $10,000 from somewhere else, a savings account or wherever you have money, and put that into your IRA rollover so you have a full $46,000 in there, you are going to still owe income tax on that $10,000 plus a 10% federal tax penalty. And depending on the state you live in, a state tax penalty as well. At least you're not going to owe taxes on all of it.So again, the reason that you never, ever get a check from an employer and then open up an IRA rollover is cause they all will withhold 20% in taxes. The only way to do it is a custodian to custodian transfer, then they will not withhold 20% in taxes. So, if you ever make that mistake, just know you have 60 days from the date of your check that you got it to get it into an IRA rollover. Where do I think you should open up an IRA rollover? At a discount brokerage firm, Fidelity, TD Ameritrade, wherever you feel comfortable. Right now, my favorite happens to be Fidelity. Do not make this mistake, you cannot afford to do so. And I just have to say, Joann, you still want to keep $10,000 to fix up the house? You're going to lose $1000 of that to a 10% penalty. You're going to have to pay taxes on that. By the time you're done, maybe you're going to have $5000. No, do not do that.This question is from Menni, she says, how do I close off multiple paid-off credit cards without affecting your FICO score?Menni, the truth is, if your credit cards are not charging you a fee to have them, check your FICO score. If your FICO score is great right now, oh just leave everything exactly like it is, just cut them up and forget about them. If, however, your FICO score says you have way too many credit cards open and it is affecting your FICO score, as long as you don't carry a balance on any of your cards, it's not going to affect your FICO score big time. Just close the credit cards that you most recently opened, all right? Because you don't want to close down your credit history, which counts for about 10% of your FICO score.This one is from Gavaris, I think that's how you pronounce her name. I have a TSP and I am retired and I am 60. My spouse has a deferred 457, also retired, and he is 59. There is $300,000 in each (Love that.) because we wanted to use some of it for our kids' college, which is now here. Two kids are going in September of 2019. We got zero financial aid and now we find ourselves in a tax-paying disaster.All right. First of all, the lesson here is do not use a pre-tax retirement account for the purpose of funding a child's college education down the road. That makes absolutely no sense whatsoever. Why didn't you take some of this money and put it into a 529 plan? Why didn't you just take some of this money and put it in an investment account or somewhere that it would have made sense? So now what should you do? Well, maybe you're just going to have to pay the taxes on it. If this is where you wanted your money to come from, then we don't really have any way to get around it. The question becomes, are you making more money in these accounts than a federal loan or a private loan would cost for you to take out to send your kids to college? And then you just pay that from the interest in these accounts and you take them out little by little. Because if you are going to be taking out $50,000 a year or whatever to send these kids to school, because you have two that are going so maybe it's $100,000. Now you're going to lose half of that to taxes, because it's going to put you in such a high-income tax bracket, so you have to get creative here. But the true thing everyone needs to learn from this, the mistake you can't afford to make is, do not fund a kid's education with a pre-tax retirement account, all right everybody? All right, we hit our time limit. I really try to not go much over 25 minutes because I know your head just spins and you really can't take it. So, with the intro and everything were at almost 30 minutes, so I'm going to say good-bye for now, but I will continue to answer your questions. You are making mistakes, again, you cannot afford to, which is why Ask Suze Anything is so important. Talk to you soon. 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.
I have checked all the beneficiaries of every investment account and insurance policy within the past year.
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.
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