Podcast Episode - Ask Suze Anything: Roths, Taxes, and More

Family, Military, Podcast, Retirement, Roth, Roth IRA, Saving Money, Taxes, Trust, Trusts

February 28, 2019

Listen to Podcast Episode:

On this podcast, Suze talks about why making the right choices with your money will help you be safe and secure, especially in these uncertain times. She also reviews some of the Eight Qualities of A Wealthy Woman and why generosity is so important.

Podcast Transcript:

February 28, 2019. Suze Orman here, it is Thursday, so what does that mean? So, I've made a decision and I just love it that I get to make decisions because this is Suze Orman’s Women & Money podcast. So as time goes on, I want to change things. I tried this, and I try that, sometimes Sara's with me, sometimes she's not. I just, I just want to be able to do what I want to do whenever I want to do it on this podcast. Because I want to feel free, and I want to feel powerful. And I want to feel like everything that I do is something that I love doing. So sometimes when I have a format, I start to go crazy, I feel pinned in. So here's the thing. Alright, Sundays for now, I'm telling stories and lessons and things like that. All right. And on Thursdays I've now decided officially it's going to be Ask Suze. Because I have a headache. I've been going through all of your questions. Could you all send in more questions if you tried? You know, there was a time on The Suze Orman show um on CNBC that we would get 10,000 questions in a week. Are you kidding me? And I go, what are we gonna do here? And I feel like we're starting to mount this up again because it seems like you don't have any place else to ask a question. So if you're asking questions, you should be able to get an answer for them. But what's hard for me is how do I answer all of your questions? Because there's so many questions. So today I just kind of just picked some, I don't even know which ones I picked. I just did. And I said, all right, let's just answer these questions today. And again, every Thursday is Ask Suze Anything day. Now, how do you do that? You can send in a question via email to asksuzepodcast@gmail.com. And again, if it's chosen, I'll read it on the air. I may edit it a little because you're all going on for like three pages. I can't read three pages of a question. Try to make them succinct everybody. You can also call 877-545-7893 and the 7893 spell Suze, that's S-U-Z-E, and leave a question there. Because I'm going to start playing your question so that people can hear your voices, and then answer them that way. A favor that I've been asking all of you. Very simple favor. Can you go to Apple podcast and rate this podcast? Leave a review because the more ratings we get, the more reviews that I personally believe more and more women and men who are smart enough to listen will tune in and then this podcast can grow, and grow, and grow. And that is important to me. Because in its growth, what that means is that once again I'm helping millions and millions of people in an area of their life that is so, so important. And again, a reminder that on March 16th of 2019, it is coming up, if you are in the New York area, come on down and see me at the Apollo. I did an event there last year, it sold out, standing room only, and they've asked me to come bac. And I'm doing it as a benefit, so calm on down. And what I love about this is if you get your tickets before hand at Apollotheater.org, they're only $20. If however you wait to the day of the event, they will be $30. So do not wait. It's called Women & Money. Obviously, I'm on a theme this year of my book, the podcast, and everything that I am doing. All right let's go to questions. The first email I'm going to read to you is from Patricia. Now I've added these down some to really just focus on what's important so that it's interesting for everybody. But she says hi Suze, I've been listening to your podcast and I've become obsessed in opening an account with TD Ameritrade to begin investing in ETFs. Now before I continue, just listen to me. You don't have to be obsessed with TD Ameritrade. I don't care if it's TD Ameritrade, if it's Fidelity, if it's Charles Schwab, you want the discount brokerage firm. And there's many of them that offer you the least amount of money, and hopefully it is zero, to buy exchange traded funds. There are even now, I think it's with Fidelity, I could be wrong here, but that you can buy Fidelity, an index fund, and they don't have an expense ratio at all within that index fund. So don't get hung up on TD Ameritrade, do you hear me? And I will continue now with Patricia's email and she says, but recently you advised one of your callers to focus on paying off her student loan instead of investing. Her question is, should I pause investing, and pay extra on my student loans instead? I currently owe $150,000 in student debt, I currently pay $1,100 a month towards that debt, I earn $60,000 a year, I look forward to your guidance, Patricia. The first thing that concerns me here seriously is you have $150,000 of student loan debt. Why does that concern me? Because student loan debt, in 99.9% of the cases, can never be discharged in bankruptcy. If something happens and you can't afford to pay that $1,100 a month, you get sick, you get ill, that student loan debt doesn't stop growing. It grows from 150,000 to 300,000 to 600,000. And then they come knocking at your door, and later on in life even now they have the legal authority to garnish your wages, to garnish your social security check. So student loan debt is the most dangerous debt that you can have bar none. More dangerous than IRS debt. Because there are ways to claim bankruptcy against IRS debt. When you have student loan debt you are stuck, you are stuck, you are stuck. So that's number one, number two on $150,000 of a student loan debt, normal repayment under the standard repayment method, which means in 10 years it is gone, would be approximately $1600 a month. That's $500 more than what you are currently paying. So that says to me, you are not on the standard repayment method. And why does that concern me? Because you are on some income-based repayment method. And at the end of the term, if you should be paying 1600, and you're only paying 1100, that $500 difference is added on to the back end of your loan, plus interest. And so the loan can start to grow somewhat. Right? So it's really important, because if you think about it, you know maybe you will have paid off $132,000, something like that over the 10 years, which isn't even close to the 150,000 plus the interest, and here's the problem. At the end of the loan, anything that you should have paid and you didn't pay is tax to you as ordinary income. So it is essential that you really know how student loans work, and what you're doing, and what you're not doing. So yes, if this means that you are on an income-based repayment of some kind, and this is the situation that you're in and your numbers tell me that it is, I would make it my number one priority to get rid of that student loan debt. Next email comes from Tammy. And Tammy say, hi Suze, you all say hi Suze. I think that's cute. Anyway, I am retired military two years ago and working full time as a federal employee. Hope you weren't one of the ones they laid off. But anyway, I live off my military retirement. And my current salary goes into a TSP which means Thrift Savings Plan. She's single. She has no kids essentially. What she is asking is this. Should she leave her Thrift Savings Plan, and a Thrift Savings Plan is what the military and the federal employees have just like your 401k plan, your 403 plan. Those are for military people. All right. And her question is should she leave it in the G Fund, which is a fund in there, or transfer it to another account. Unless there are penalties. Here's the thing, my dear Tammy. You could obviously leave this money in your TSP and make it safe and do things like that. Or you can do what's known as an IRA rollover. Where you go to one of these discount brokerage firms that I'm talking about, Fidelity, Schwab, TD Ameritrade. You open up an IRA rollover, they then contact your former employer, the military and then they transfer the money that is in your TSP with the military into an IRA rollover. There no taxes are withheld. That is the proper way to do it. And now you have your money outside of the military. But you have your money someplace that you can buy individual stocks, individual bonds, you can buy certificates of deposits, exchange traded funds, no-load mutual funds. All these things that you may want to do. I very seldom ever advise leaving your money and at ex-employer’s 401k or 403b plan. Once you have left that employer, you should be doing an IRA rollover. Time to go to Suze school. Alright so this is what you should be asking. You haven't. So now we're gonna go to Suzy's school, because remember I started this by saying I'm going to do anything I want to do. You need to be educated on something here. So listen closely. When you have money at an ex-employer in a 401k, a TSP, or a 403b, and you want to do an IRA rollover, and you request your employer, your ex-employer, to send you the check, it is mandatory that they withhold 20% for taxes. It's called a 20% mandatory withholding tax. Let me make this simple for you. You have $10,000 in a 401K, and you want to do an IRA rollover with it. So you get a check from your ex-employer, you have $10,000 in there, they have to withhold 20% or $2,000, you get a check for $8000. And now you have 60 days from the day that you got that check to take that check down to TD Ameritrade, Fidelity, Charles Schwab, whatever it is, a discount brokerage firm, and open up an IRA rollover. So now you put $8,000 in your IRA rollover. Here's the problem. You really had $10,000 in your 401k account. They withheld 2,000 of it. That means that really you should have $10,000 in your IRA rollover, but you only have 8,000 because they've withheld 2,000 for taxes. If you do not come up with $2,000 out of your own pocket to put in your IRA rollover, you will owe taxes on that $2,000. Now that may not sound like a lot, but I just gave you an example of $10,000. What if you had $100,000 in your 401K, and now they withheld $20,000, you're gonna owe income tax on $20,000. What if it was half a million? Do you understand what I'm saying everybody? It's going to be taxes that you should not have to pay. How do you avoid paying those taxes? By going to the discount brokerage firm or any place you're going to do this, open up your IRA rollover, and have them contact your ex-employer, and they will do a custodian to custodian transfer. And what that simply means is it goes directly from your ex-employer to your IRA rollover, it never touches your hands, and therefore they do not have to withhold the 20% mandatory withholding tax. This is very important what I just told you, you should put it in your little brain and you should never forget about it. Because if you ever leave your job and you want to do an IRA rollover, there's only one way to do it. Otherwise you are going to screw yourself people. And that isn't going to be good. Next question is from Logan again. Logan says hi Suze, hi Logan. I know why you typically recommend roth 401Ks, but I'm wondering if I'm an exception to the rule. I have a relatively high salary, 220,000 plus. So therefore, I think that it's more likely in my retirement that I will be in a lower tax bracket than when I am working. So should I switch to a traditional 401k? Logan, if I were you, I would still do a Roth 401k, and let me tell you why. You didn't tell me how old you happen to be, but let's just say you're relatively young. And you still have 20, 30, 40 years until you're going to need this money. And now this money is growing, and compounding for you, it's in a Roth, and there you go. And now it's worth millions, you have millions in this account. And it's a Roth. And because it's a Roth, guess what? You don't have to start taking withdrawals, mandatory withdrawals at the age of 70.5. You can leave that in there forever. Oh you die, and now you pass it down possibly to your beneficiaries. Let's say you're married, you have kids or even if you don't to anybody, they get it totally tax-free. Income tax free. Next. Later on in life, alright. So you've got these little tax write offs, you know, maybe they're saving you, you know some money right here. But what do you do with that tax write off? Do you really invest it? Do you really compound it? Chances are you do not. You probably just fritter it away if you forgot about the tax write off now later on in life. Here you are. You have millions in this account. Let's just say that's true. And all of a sudden you look, oh I want to retire but I still owe $400,000 on my home. Wouldn't it be great if I could pay off the mortgage on that home? I have 400,000 at least in my 401k, but if you took off 400,000 from your 401k Logan, that's gonna put you in a high income tax bracket. So you know, you've totally screwed yourself. In a Roth 401k, all right, you could take out $400,000, pay off the mortgage on your home because there's no income tax. A law of money, invest in the known versus the unknown. You don't know what your future is going to bring. You do not know where income taxes are going to go. Are you not hearing what some of the candidates are saying? Let's go up to 70% income tax bracket, let's tax this, let's tax that. The United States of America is in total deficit. They do not have the money to pay their bills. Do you not think that it is absolutely possible, if not probable, that years from now the problems will be solved by raising income tax brackets? All I know is this. I put money into my retirement accounts, and at my tax bracket, I have converted them to Roth accounts. Now. Why did I do that? Again, because I don't want to have to number one start taking money out because I'm not gonna need it, but it's really incredible that I have a lump sum of money that I can leave to people that they're not going to have to pay a penny of income tax on from my retirement accounts. I love Roth 401ks, I love Roth IRAs, I love roths, I love roths, I love roths. you should know that forever and a day. However, it's your money, and it's gonna affect the quality of your life, not my life. So check with your CPA, check and run the numbers, and do what your gut tells you. Got it? Let's move on to Jackie. Hi Suze, I'm 36 years old, full time working mom and recently divorced. I've started following your financial freedom plan and it has been so empowering. I love that Jackie, I can't even tell you. A few months ago my grandma passed away, and I'm going to be inheriting $14,000. I've been thinking about how to best invest this money. I don't have any credit card debt, but I do have a car loan at $23,000 and student loans. Student loans. You know how I think about student loans at $23,000. I've been working towards having an eight-month emergency fund, but I'm not quite there yet. How would you recommend investing the $14,000 inheritance? Boosting my emergency fund, paying off my car loan, or paying off part of my student loans? All right. You're listening to this. How am I gonna answer this? How would you answer this? What would you tell Jackie to do? What I would tell Jackie to do? What I would tell Jackie to do, is I would tell her to do the student loans. She has $23,000 left of her student loans. If she takes her $14,000 that's going to leave her not very much in student loans, is it everybody? It's gonna be $9,000. Therefore Jackie, if you continue to pay whatever you were paying on your student loan, in a very short period of time that student loan is going to be gone. Then you're going to take that amount of money that you're paying towards your student loans, and you are going to pay off your what? Your car loan. And after your car loan is paid off, you're going to take the amount of money that you're paying towards your student loans and towards your car, and you are going to put it in your emergency fund. That's exactly what you are going to do. Next email is from Jill. She says Suze, help. I would love to get some advice for you. I feel shameful and I realize I made an awful financial decision. I got divorced in 2015, and the first guy I dated after the divorce was a guy who was completely broke. He wanted to go back to school so he could get a better job. He couldn't get loans for school. Now we have trouble. Right before I even go on reading this, can I just say something? Can I just say something? Right here, right here Jill, where it says he couldn't get loans for school, anybody can get loans for school. They want to lend you money to go to school because again, student loans are dangerous, and they can get you. That was the first warning sign that this guy was a loser. A big time loser. So I can see by I'm reading this, is what happens is you give him $10,000 to pay for his school, and he's gonna pay you when he gets back on his feet. And now you tell me in this email, that he gets kicked out of the program that he was in. And then you wake up, and you break up with him. Now you have an arrangement with him, where he is paying you back at $20 a month until he gets a better job. And you're saying, it's 2019, and he's still only paying me $20 a month. And that you're gonna be dead by the time he pays off his debt. Your question to me is, should I go to small claims court and try to get the money back? Do I just say forget it, because I don't want to be reminded every month of what an idiot I was? Oh no, no, no, no, no. Jill I want you to be reminded every single month of what an idiot you were. And I want you do not stay in your past where you look at this and go, I'm an idiot still. I want it to serve as a reminder to how far you've come, really. That you made some bad decisions in your life, and this is a reminder that you're never gonna make another bad decision, ever. However. You didn't make totally a bad decision, because who continues to pay off a loan at $20 a month for the past like four years or however long it's been happening. So there's something good about it. At least you chose somebody who made a commitment to you, and he is keeping that commitment. So no, I would not take him to small claims court, because you actually signed an agreement with him according to your email, that that's all he had to do. Pay you $20 a month. So let him pay you $20 a month, go on with your life, and every time you get it, you should put it into an account that says this is not the person I am anymore. This is who I was, I was vulnerable, I just got out of a divorce. Listen, it came from a good place. But you will never make that mistake again. And the fact that you made that mistake, hopefully anybody who hears this email, your question, and my answer will never, ever, ever make that mistake again. I just have to say something else. It's not just this mistake of giving somebody $10,000. And this isn't about Jill's letter now. This really is about cosigning loans. As I've looked through many of these emails, too many of you are writing in and saying to me Suze, I cosigned a loan for a friend. Too many of you are writing in and saying Suze, my husband cosigned a loan for a friend of his to buy a truck. And on and on. And undoubtedly after two or three payments they stop paying, and now you're stuck for that loan. That loan now has ruined your credit score, because you weren't even aware that they weren't even paying until the bank called you to say haven't paid on this for at least 90 days. And you don't know what to do. There are a few things in the Suze world of money that you must never ever, ever do. Vow right now, you are never, ever, ever going to cosign a loan for anybody. I don't care if it is your child, your brother, your sister, your friend. I don't care who it is. If a bank will not lend them money, you cannot lend them money. And if you are not going to abide by that, and you're still going to cosign a loan for somebody, then you make sure that that person pays you, and you pay the bill. Because then you will know when they stop paying the payment so that you don't get your credit ruined. You better have that money somewhere, because you're gonna be on the hook for it. Let me go back just very quickly to another email which was a husband cosigned a truck loan for a friend of his. Now here it is. The friend is gone, with the truck. And they now are 90 days late, their credit score has been ruined, they don't have the money to pay for the truck, and now they're in trouble. What's going to happen? The company, the finance company, oh they'll find the truck. They will repossess the truck. If they owe $20,000 on the truck, they've repossessed it, they'll sell it for 10, and now these people are gonna have to pay $10,000, and not even have a truck or anything. I am begging you, please don't cosign a loan. Alright. One or two more. Because I know you really can't take more than a half hour of me. Hi Suze. Let's say my husband and I have a trust. Alright let's say so. This is from Donna by the way. What if after creating the trust, a divorce happens. How is the trust dissolved? In addition, should I keep my personal bank accounts out of the trust? I want my son who is a young adult over 21, to get my Roth IRA balance plus what's in my checking account. Is that possible? My husband and I have separate and joint accounts checking and savings. Thank you. Donna, listen to me. Any trust that is created, whether you're single and when you get married, married and now you have one kid, two kids, three kids and now you're divorced. All you have to do is change your trust. Your original trust gets invalidated, you get a new trust, and it's just that simple. A very easy way, however for your son who is a young adult to get your Roth IRA, is simply leave him as the primary beneficiary on your Roth IRA, a listen closely a named beneficiary on an IRA, a life insurance policy, whatever it may be. When you have an account that allows you to name a beneficiary, your named beneficiary on that account overrides the wishes of your will and your trust. So if you want to leave this Roth IRA to your son, just make your son the primary beneficiary of your Roth IRA, And then your trust as the contingent beneficiary. Your checking account, if you want that to go directly to him, then all you have to do is make it a pay on death account. That's all. Keep it in your individual name, and on your death it will go immediately, bypassing probate, to your son. The other thing I just want to say about retirement accounts. Retirement accounts can never be held in trust. IRA stands for an individual retirement account. So it has got to be held in an individual's name, not in the name of a trust. When you're in a 401k plan, it's an employer sponsored retirement account. Your trust is not the employee you are. So all retirement accounts are held in individual names. I hope that helped. All right. And this one really is the last one. Says hi Suze, Aidy here. I would like to ask you if you feel having federal money taken out of your paycheck every week for tax time come April is smart. My husband is self-employed and we currently take out $175 a week from his paycheck to have around $9,000 towards taxes. Come April we typically owe around $18,000 each year, then minus the nine grand already taken out leaves us with owing nine or less. Would it be wiser to invest that money each month instead? Aidy, Aidy, Aidy. You gotta be very careful here, you cannot risk investing tax money. You only make an investment with money that you do not need for five years, 10 years. You would never invest money that you need every year. Now. What concerns me here is your husband is self-employed and you're taking out money and from his paycheck of 9000 but you're telling me that you owe $18,000 a year. So you are under paying your taxes and you will find that they're going to penalize you because the rule is when you're self-employed, you have got to make estimated tax payments if you're expected to owe $1,000 or more which you are, and they're due April, June, September, and January. Usually, the 15th of every one of those months unless that's a weekend. So you've got to send it in normally in four equal installments. So for $18,000 on those dates, you should be sending in $4500 on each one of those four dates that I just mentioned, but it doesn't seem like you're doing it. So can you just see a CPA, can you go see somebody and talk to them because Aidy, we don't want you to be making mistakes. Alright so I think that's enough but again here's what we're doing everybody just to recap. On Sundays, I'll give you a theme, and on Thursdays it's Ask Suze Anything. So send in your emails, asksuzepodcast@gmail.com. You can do it that way. That's actually the simplest way. Just do it that way, and we will go from there. But until Sunday, there's only one thing that I want you to remember when it comes to your money, and it's this people first, then money, then things. Now you stay safe together.

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Suze Orman Blog and Podcast Episodes

Suze's Financial Strength Test

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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