401k, Retirement, Roth, Roth IRA
August 05, 2021
Listen to Podcast Episode:
On this podcast of Ask Suze (and KT) Anything, Suze answers questions from Women & Money listeners Jordan, Bella, Davita, Heather, Tricia and more selected and read by KT. Plus, a quizzie for KT.
August 5th, 2021. Oh no. Oh yes. Oh no. Oh yeah, the summer is slipping away. My favorite season of all is summer and it's slipping away before you know it. We're gonna be doing a podcast and it's going to be Labor Day and then what? I'm just staring at her like what? Why is this your favorite season? Always summer, is my season my birthday. It's hot. It's long, long, long days in terms of light, I love light, I love sunshine. I can swim all the time in the ocean and the pool and wherever I am, I love it. Summer is my favorite. Alright positivity. Welcome everybody to the asked Suze an KT anything podcast. So, to begin with, because some of you are, I'm sure wondering how do you get to ask a question on this fabulous podcast? And it's very simple right into email@example.com. That's actually the simplest way to do it just right there, ask your question and of Miss Travis chooses it, it will be answered on the air, and I do also go through these, I just never know which one she's really going to ask me on the air, but I go through them and if I find one that really needs attention immediately, I do personally email you back as many of you know, so really take advantage of that. So, what do you got up your sleeve today Mrs Travis. Today's a theme day, like a theme park in the summer and KT decided to face her fears. So, this theme is about retirement, and with retirement comes my favorite buddy Roth. So, this is a get you a little tiny bunny stuffed bunny and have it be the name of it will be Roth, I'm going to have you sleep with it. Okay, Suze. So, the first question is from Jordan. Hi, KT and Suze. Thank you for your fun and inclusive podcast. I have a question about Roth IRAs. I'm 31 years old. I've been dollar cost averaging into a Roth IRA with Fidelity at about 150 a month with more going into my 403B. However, I've been hearing that fully funding my Roth at the beginning of the year is preferable with the idea that more time in the market is better than timing the market. But with this strategy, wouldn't I be losing out on the advantages of dollar cost averaging? Should I fund my account with a money market fund and then dollar cost average into my favorite ETFs every month? I think I have analysis, paralysis help. All right, that's cute. All right. So, my dear over analyzer Jordan, here's the problem is that years ago when that theory was correct, that would be when the markets were low and you took a lump sum of money and you invested it in January versus waiting and dollar cost averaging over a year or a year and a half since you have till April 15th of the year after this year's Roth to fund it. And then it would make sense to absolutely get the money in the market as soon as possible. But you have to remember. Not every rule applies to all circumstances. Right now, the markets are as high as they've ever been. Some people think they're going to go down, some people think they're going to continue up. Nobody knows. And because interest rates are so low right now, there is really no advantage of funding your Roth at the beginning of the year and keeping it there and then dollar cost averaging because how much money are you going to make on the money market portion of the Roth? So, I at this particular period of time would only be dollar cost averaging and whether you put the money in in one lump sum and dollar cost average from there or you fund it every month, whatever is easier is what you should do. Okay, next question is from Bella, I love that name, Bella. Bella, love that name. Hi Suze. My company is allowing conversion of a 403B pretax plan to Roth within our 403B. Is this a good idea? Any taxes associated for conversion? Yeah, you have to be very, very careful Bella because any time you convert money anytime, whether it's in an employer sponsored plan or it's in your own individual retirement account and you are converting it to either a Roth IRA or a Roth 403B or a Roth 401K. You are going to owe income taxes on whatever amount you converted and that money cannot come from the money that's in your Roth or in your retirement accounts, it has to come from money that's outside of retirement accounts. So, I would be very careful about converting large sums of money. I think what's probably wiser at this point in time, is your new contributions should go into the Roth 403 B. And maybe you just leave the regular 403B exactly like it is. But I would consult a CPA and ask them. Okay, next question is from Davita to hi Suze and KT hope you two are having an awesome week. Are we having an awesome week? Alright. I have to have to answer this. We are having the best week ever in the past year because Suze, it's first, it's summer. Second were on the island. So, we're Covid safe. And Suze has been coming with me on the boat fishing. She can't fish and she can't drive the boat, but she sits there and just yells at me and Colo tells us what to do. And we've been catching what crazy because she's still the captain. We say she's still the captain. She knows how to fish where they are and what we should be doing. And as soon as we finish this podcast, we are going out again and it feels wonderful to be on the boat. I pose in pictures in the captain's chair, but I'm not driving the boat. She's, she's so, it's so much fun to have the team back. That's all I can say. So yes, it's an awesome week. So, here's Davita’s question. Suze. I opened an IRA about three years ago. I didn't really know what I was doing. So, I opened a Roth IRA savings account. I'm glad you didn't know what you were doing to Davita. So, it has a fixed interest rate per year. I don't think I qualify for a Roth. Now, Suze, I like this question because Davita is a freelancer. So, her income fluctuates. I made close to $100,000 last year. Should I transfer this money into a traditional IRA investment account or leave that money there and open a new account? Am I going to get penalized for having a Roth that I don't qualify for? Great question. So, I want to hear the background. She's back and she doesn't care about the backdoor. Okay. I care about what will you would tell her me. Me? This isn't a quizzie. I'm not going to give any advice, but I like that she's a freelance. I'm not going to tell her what to do. I know I'm going to get you, tell her what to do. You're the captain and you're the financial expert. Here's the problem in the same way that you say in this email that you didn't know really what you were doing. So, you opened up a Roth IRA and KT comments, it's a good thing you didn't know what you were doing. It's important that you know what you're doing when it comes to who qualifies to be able to have a Roth IRA income-wise and who does not. So, I don't know if you are single or married, but I'm going to assume that you're single because you don't mention that you're married on any level. You can make up to $125,000 a year of adjusted gross income and still put in a full maximum contribution of $6,000 if you're under 50, $7,000 if you're 50 or older into a Roth IRA. That goes away once you are making over $140,000 of adjusted gross income as a single. So, why do you think that you don't qualify? You absolutely still qualify for it. So, continue to fund it. And when the day comes that you make too much money to have a Roth IRA or qualify for one. The money that's in there gets to stay in there. You don't get disqualified because one day you make more than what you need to qualify for that year. Did that make sense? So, don't do anything. Okay that's great, Suze. I didn't know that. No, I didn't know that. That's good. Alright I said I told you I'm facing my fear I'm learning more and more. This is the next one is from Heather. And see she said Suze, I just listened to your podcast today from July 29th, 21 with the quizzie from KT. I want to ask a follow up question. Do you want to remind everyone Suze what that quizzie was? Do you remember? No. All right. I can kind of remind you what when deciding between contributing to her employer sponsored plan that gets funded whether she contributes or not a Roth 401K and a Roth IRA why wouldn't she try to max out the Roth 401K. First. My thought would be to do that because the contribution limits are higher for a 401K. Than an individual IRA. I get that ideally she would fund both. I can't I have doesn't this sound doesn’t this question sound like a tongue twist actually now makes total sense to me. I get that ideally, she would fund both. But why would JT be advised to fund the Roth IRA first? Thanks for clarifying good luck Suze. Well, my dear Heather, this is the reason why there is a tremendous difference between what's known as a contributory Roth IRA. Which is an IRA, that's funded after tax with money that you contribute every single year and money that you put into a Roth 401K. So, the reason why I especially would do the Roth IRA first if her employer sponsored plan is not matching is because JT can get at any money that's in her Roth IRA, that she originally put in without any taxes or penalties whatsoever. That is not how a Roth 401K works. Now, if JT had said to me Suze, my employer offers a Roth 401K. That has a matching contribution up to 6% of my base pay, the advice would have been you first fund up to the point of the match and then fund the Roth IRA. So, obviously because I really don't remember um the quizzie from last week. Remember I am 70 everybody. That's besides the point. Right. Is that I'm sure there was no match involved with the Roth 401K with JT. Therefore, if your employer does not match you are far better off. If you qualify having a Roth IRA first funded to the max and then the Roth 401K, if you have extra money to invest. Oh good. That might be good advice for this. Next question from Sid Hi Suze. I started working with my CFP. For those of you that don't know certified financial planner. By the way. Suze's licensed every year updated with this. She's also a since 1986. I think she's been a CFP for way too many years. I started working with the CFP who told me to contribute the maximum possible to my Roth 401K, $19,500 a year, because my income of $150,000 won't allow me to contribute to a Roth IRA. In your book, Women and Money, you advise us to set your contribution rate high enough to get the maximum match but no higher. In my case, am I contributing higher is the advice of this adviser to max it out to $19,500, bad advice? No, actually it's the perfect advice and the reason that it's the perfect advice is that, if your adjusted gross income is over 140,000 and you say it's 150,000, you do not qualify for a contributory Roth IRA at all. So, then you're just far better off seriously just funding your Roth 401K to as much as you possibly can. Now you're also eligible however, to do a back door Roth IRA. So, listen to the past podcast. So, if you decide to do that, that you don't make a mistake and you do it the way that I tell you to do it. Okay, good. Okay. Tricia hi, Suze. I'm a long time follower of your advice. I'm 56. I earn 104,000. I paid off all of my credit card and student loan debt. Good girl. And I have $100,000 mortgage with a 2.9% interest rate. I have $20,000 in cash for savings. I have $97,000 in my retirement accounts. I'm contributing 10% in my regular 403B. But we have a Roth 403B, as an option. Should I switch some of my contributions to the Roth 403B? What's the answer KT? Yeah. Yes. Now as many of you may know and there are some people that disagree with me on this but I don't personally care. If a Roth retirement account option is offered to you with new contributions. In my opinion, you should absolutely be putting that money in your Roth 403B, be your Roth 401K. Your Roth TSP. So, even if they don't match, I would be doing that, but I would only be doing that after if you qualify, I funded my contributory Roth. If you don't qualify for a contributory Roth then absolutely fully fund your Roth employer sponsored retirement plans. Great, so Suze. The next question is hi Suze, I'm reproaching retirement. How do RMDS and the 4% rule work together. RMDs are mandatory but they are usually lower than the 4% rule. Very confusing. It's okay. KT do you think we need to explain what the 4% rulers tell them what the RMD is? So, RMDs are for all of you, once you turn 72 years of age now, for those of you who were born after July 1st, 1949. Before that it was 70.5. But if you were born after July 1st, 1949. By the time you turn 72, You have got to start taking money required minimum distributions according to a specific formula, out of your pre-taxed retirement account. What if they don't, what happens? You get a 50% penalty. Like if you were supposed to take out $4,000, KT and you did not, they're going to penalize you $2,000 for having not taken it. How do they do that? Oh they're gonna, they have the rules, they have everything that they know, right. It will show on your tax returns, that will show that you didn't take out what you should have taken out of the flag. So, you have to be really careful and know about this rule. And the truth is you have until April 1st after the year that you turn 72 to be able to take out that required minimum distribution. Now, how much do you have to take out for a required minimum distribution? If all of you just google required minimum distribution amounts, you'll see the table. If you want to see the exact table, knowing that it's accurate, you would go to irs.gov and on publication 590 they actually have KT, the RMD tables. So right now, is the tables is based on your age, age and your income. No, just your age. And the amount of money that you have in the retirement account. So, let's just say this person had $100,000 in, you know, in her retirement account. All right. And she's 72, let's say she turned 72 this year. If you look up on that table, I think you're going to find that the life expectancy at 72 is about 25.6 more years. So, they are projecting that this person has 25.6 more years to live. I know. Just listen to me. All right. This is the life expectancy table. You would then divide $100,000 by 25.6. And she would have to take out about $3,900 to meet her required minimum distribution. That makes sense to you. That's how everyone has to do this. Well, usually the CPA or an enrolled agent, does it, but that's how it's figured out. And every year that goes on the required minimum distribution goes down just a little bit. Not a lot, but just a little bit. So that by the time like she's 115, it all has to be gone. So, they project all the way out to like 115 years of age. But can you take that money out and then just open another like Roth account? Only if you have earned didn't come. Oh, see that's not earned income, earned income right? So, in this case we have to spend it, you don't have to spend it, you can save it, you can invest it but it doesn't have to go back into a retirement so I could just put it in my Alliant account for instance. Yes, I get that high percentage. So, in this case the question is she also wants to know how does that compare to the 4% rule. And the 4% rule is this many financial advisors say that if you only take out 4% of the amount of money that you have within your retirement account every single year. That money should last you approximately another 25 years or longer. So, many retirees look at the amount of money that they have in their retirement accounts like this would be $100,000, and if she needed money, she would take out $4,000 this year. Now if you notice the $4,000 from the 4% rule, KT, are you really following that? I am 4% rule, right? Is the $4,000 is very close to the $3,900 that she would take out under RMD. So, they're really close but as time goes on, depending on how the money that you have invested in your IRA is doing that, the 4% may allow you to take out even more than the RMD. So, it just depends there's no way really to answer this question because it just depends what you're invested in and what your money within your retirement account is doing. So, everyone needs to know where to go to do that little calculation. Yeah. But again, I don't particularly believe in the 4% rule Because what if all of a sudden your money is going down, down, down and you're taking 4% you could you never know what can happen. But that's so that, but you have to believe in the RMD because it's the law. You don't have to believe in it. You just have to do it. All right okay. Is that everything? That's it? I have a quizzie coming everybody. Well, I have two here for you. Two quizzies. Do one that I can get right first? Well, they're both so good. All right go for it. This one's from Barbara, right? She says I turned 72 this month and I have been told that I can wait till April 1st of next year. Actually, that's what I just said right to take my required minimum distribution. Should I? Yes. And why is that KT? Because it's the law. You have to know. I never said that. I see. Have you have up until April 1st, after the year that you turn 72. So, it's only a one-time thing every year after that you have to take it out by December 31. So, the very first distribution from your required minimum distribution from your IRA, has to be taken out at least by April 1st after the year that you turn 72. Yes. Should you? Yeah. Why? You have to. Well she could take it out this year. She doesn't have to wait till next year. But if should she take it out? Should she take it out in 2021? Or should she take it out in 2022? Here goes KT again. Come on. You can do this, it’s not a trick. It's not a trick question. It's not Yes. This is a decision that many people need to make. But alright. All right, Suze. This isn't fair. I keep saying all right. So, you think you should wait till next year? And you think I'm trying to trick you into saying this year? Right? So, you're simply answering based on that? I'm that you think I'm tricking you ready? So, you think it's next year? You sure? Final answer? Yes. Nope! Can’t outsmart me, KT, can you? That's not so not fair. You would think after 20 years, you would know that. You cannot outsmart me. No. No one can outsmart and don't ever bet her anybody. Do you know that Suze? Every time she says okay, I'll bet you how much you want to bet? And I say a dollar, she says make it 100, no a dollar, make it 1,000. I owe Suze millions of pounds of All right, let me answer this for everybody. The reason Barbara, I would take it this year rather than next. The key there was that you are only allowed to do this for your very first required minimum distribution. After your first one is taken, the next one has to be taken out by December 31st of that year. So, if you wait until April 15th of next year to withdraw it, you're also going to have to take out one for 2022 by December 31st of next year. That means you will take out two required minimum distributions in one year, which means you will pay even more taxes because remember this is money that has never been taxed. So that may make it that you pay more taxes on Medicare, on Social Security. It can hurt you that way. So, I would not recommend waiting until next year to take it out unless you know next year you are going to be in a seriously low-income tax bracket because the only income you're going to have, is from your retirement accounts. That was good. You sure? I understood that. Oh my God. All right. So that brings us to the end of another KT. All right. I'll take it out. She can't she can't Okay everybody until Sunday. Stay safe, stay strong and secure. Bingo. See you soon.
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