July 14, 2019
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In this episode, Suze School is in session and the lesson plan includes what you need to know about planning for retirement.
July 14, 2019. I'm not sure what I want to call today's podcast, because there's so many things that I have on my mind that I want to talk to you about. I could go in so many different directions. So I'm gonna just kind of ramble today to you about things that are on my mind. And if they're on my mind, it's because you need to know about them. So let's begin. First. You are writing in, and many of you are asking me if you have enough money to retire. And you're showing me what you have in your 401ks, and your Roth IRAs, and your pension, and your homes that you own outright or whatever it may be. And you're saying can you afford to retire? But what you are not thinking about is this. And I need you to listen to me closely. Women. We live longer than men. Actuarially speaking. I've said this before, I'm gonna again say it. My father died at 71. My mother lived, and she was 66 at the time he died. She lived until she was 97 years of age, for 31 more years. Just look around. At any nursing home, or any adult community, and you will see far more women than men. And why is that? Because men die before we do. And the mistake that you are making when it comes to your retirement planning, is that you keep figuring this is what we're both getting for social security. This is what he gets as a pension and I get 50% of it, or I don't get any of it. This is how much we have going on. But you're not taking the time to assume that your spouse has died. Now, do you have enough money to retire? You cannot count on both social security checks. Both this, both that. If you're going to lose some of that income, when a death occurs. Now think about this, you're both getting a social security check and you have figured out your retirement on both of you getting a social security check. And now your spouse dies. And maybe his social security check, if you're married to a man, is more than yours. What happens? You then stop getting your social security check and you take over your spouse's social security check. But you now, are out a considerable amount of money every single month. The next thing you have to really figure out when looking at your retirement isn't, do you have enough to keep going when everything is healthy, and everything's good. You have to hope for the best, but plan for the worst. I have told you this before. And so you have to assume, okay, we have this much money. I have a great life insurance policy. Even though I hate whole life insurance policies, I could not be getting more emails now. You know, a few weeks ago I did a podcast on teachers and nurses and their whole life policies. The amount of mail that I am getting, where you are realizing what a big rip off the whole life policies are that you've been doing, it's not even funny. So all right. But you have insurance, you feel great, everything's good. But what you have not planned for, is all of a sudden, your husband has a stroke. Or your spouse gets ill. And now, that person has to go into a nursing home. And you don't have long term care insurance. And now, it's costing you 10,000, $15,000 a month in order to keep your spouse in a nursing home. At the exact same time, you still have your same expenses, where for you to live at your home. But you didn't plan for that. So now what you're doing is you're having to withdraw money from your retirement accounts, and most of your retirement accounts are pre-tax. So you have to take it out pay taxes on it, now because you're taking so much income and everything is coming out, now you're going to have to pay taxes possibly and your social security checks, and here we are, all of your retirement money is going to keep your spouse where? In the nursing home. Now the spouse dies. Do you understand where 'm going here? So when you spend the time to figure out if you can afford to retire, if you are married, and your retirement is based on both of your social security checks, maybe a pension, whatever it may be, you have got to plan it as if you retire, and the very next day one of you dies. Will the surviving spouse be able to be okay financially speaking for the rest of his or her life? That's what you need to do to figure out if you can afford to retire. If you are single, and you don't have any dependents, and you're not really counting on anybody else's income or anything, okay. It's a whole nother deal. But most of you writing in, are with spouse and trying to figure it out that way. That's one thing that's been bothering me. Next thing that's been bothering me, I just want to make sure that you are absolutely clear that when I am talking about a Roth IRA, in any way that I'm talking about it. As you know a Roth retirement account. Whether it's a Roth IRA or a Roth 401k, or a Roth 403B are my absolute favorite kinds of retirement accounts bar none. And I don't care what tax bracket you're in, I don't care that you're gonna have to pay more on your income taxes today. The younger you are, the more I love them for you, because over time wouldn’t you want your money to grow tax free versus tax deferred and you don't even know what kind of taxes you're going to have to pay later on in life when you go to withdraw it? But when I'm talking about it, I do not, and I repeat, I do not want you, if you have a lump sum of money that you have already invested in a traditional IRA or a traditional 401K, or 403 B, or TSP if you're in the military. I do not want you to convert that money to a Roth account. Any money that you convert your going to ordinary income taxes on it. So until you consult a CPA, just leave the money that you've already invested alone. I am talking about your new contributions that you are going to be making. Those new contributions should go to the Roth 401K, or 403 B, or a Roth IRA. And everybody, you need to know that you can have an IRA account along with a 401K account. You need to know that so you can have both of those things. So that is another thing that has been bothering me. Because I think some of you may be making mistakes because you don't understand it. Also, this five year rule. You are writing me in and you are confused about it. So please listen carefully. There are two main types of Roth IRAs. The first is a contributory Roth. A contributory Roth is where you, every year, fund it with money that you have already paid taxes on. You make a contribution to it, and that is your retirement account, or one of them. If you are in the year 2019, under 50, you can put up to a maximum of $6,000 a year in that account. If you are 50 or older, you can put a maximum of $7,000 a year in that account, assuming that you make at least six or $7,000 a year of earned income. Got that? When you have a contributory Roth IRA, the amount of money that you originally contributed, that you originally put in, $6,000 this year, $6,000 next year, 6,000 year after that you've put in $18,000. And now let's say you're 38 years of age. And that $18,000 has grown to $20,000. You can take out anything up to that $18,000 that you want, without taxes, or penalties, regardless of your age or how long that money has been in there. It is that $2,000 of growth in this situation where you have got to have that account for at least five years, and be at least 59.5 years of age before you can take out those earnings tax free. Are you clear on that? Your original contributions you can withdraw anytime you want with a contributory Roth IRA. It is the earnings, the growth on that money, that has to be in there for at least five years until you are at least 59.5 years of age. Next second type of Roth IRA. And listen closely now. You have a traditional IRA, and you want to convert it to a Roth IRA. There are no income limitations to be able to, do so anybody can do that. So if you have a traditional IRA, a SEP IRA, a simple IRA, and you want to convert it to a roth, you can. You can also take money that's in a employer’s retirement account that maybe you're no longer working for, and you can do an IRA rollover into a Roth IRA, but it's still a conversion, really. When you convert money, any amount of money that you convert, you are going to owe ordinary income tax on that money. Got that? But here's what else you need to understand. Unlike a contributory Roth IRA, that you can take your contributions out the money you already have paid taxes on any time you want, that is not true with the converted Roth IRA. When you convert money, even though you have paid taxes on that money, in order to withdraw that money penalty-free and tax-free, it has got to be in there for at least five years. The earnings on that money, have to be in there for at least five years, or until you're 59 a half whichever one comes last. Did you hear that? Whichever one comes last. So if you convert money, right now, into a Roth IRA, and you're 58 years of age. You now pay tax on it. You're gonna be 59 and a half in a year and a half. That money has got to stay in there until you are 63 years of age to be able to take it out tax free. Five years, or 59.5, whichever one comes last. It is very very important that you know these rules. These rules also apply, to if you inherit an IRA. Especially a Roth IRA, to how long that money has been in there before your kids can take it out tax-free. So these are things that you need to check with your CPA about. You need to be very clear about these rules, and how they work. Next. A lot of times I say to you, you absolutely should, if you have a 401K at an old employer, you should do an IRA rollover with it. There are exceptions to this rule. Now listen closely to me. If you make over the income limitations for a Roth IRA to have a contributory Roth IRA, what are those income limitations? If you are single, you can put in a full contribution to a Roth IRA, if you make under $122,000 a year of adjusted gross income. Once you make over $137,000 a year, you no longer qualify for a contributory Roth IRA. If you are married, filing jointly, you can put in a full contribution, as long as your joint income is under $193,000 a year of adjusted gross income, and you no longer qualify for a Roth, once you make over 203,000. But just because you no longer qualify for a contributory Roth, does not mean that you can't get money into a Roth IRA. And the way that you do it, is through a back door Roth IRA. And normally what that means, is you open up a nondeductible IRA, you put money in a regular IRA, you're just not going to deduct it, and you convert it to a Roth. The only reason you don't want to do that, is if you have other IRAS, Traditional IRAs, SEP IRA rollovers. If you have other IRA accounts and you decide to do a back door Roth IRA, your backdoor Roth IRA is going to be taxed according to a pro rata formula, and I'm not going to get complicated on you here. But most of you who do a back door Roth IRA, the perfect scenario to do one is, you don't have an IRA rollover, you don't have a traditional IRA, you have no other IRAs. You don't qualify for a Roth IRA, so you open up an IRA, and you convert it. Now we're great, great, everything's great. It's a non-deductible IRA, and you convert it. But if you have other ones, it becomes very complicated. So if you have an IRA rollover, if you have money and an old employer's retirement account rather than doing an IRA rollover with it, you might want to roll it over to your new employer’s retirement account. You might even want to take your IRA rollover that you already rolled over, and put it back into your new employer's retirement account. So then you can easily do a back door Roth IRA. Now are your head spinning? I bet they're spinning. I can make your head spin. But here's what's so great about this podcast. You can listen to it over, and over, and over again until you absolutely get exactly what I am saying to you, so that you are clear because the other thing that has been bothering me is that you go to see financial advisors. These advisers see that you make too much money for contributory Roth IRA, and they tell you you have no other choices, you can't have one and they don't tell you about all the possibilities that are out there. The other thing that I just want to say is this a lot of you are 55 and older. A lot of you are wanting to retire from your place of employment, and you are asking me if you should do an IRA rollover with the money that is in your 401k. Invest it so that you can live off the income, and the answer to that is no you should not. If you are 55 and older but under the age of 59.5, leave your money in your employer's retirement account, because there is a rule that allows you to take any money that's in an employer sponsored retirement plan, if you left service in the year that you turn 55 or older, you can withdraw that money without having to pay the 10% penalty tax on it. Of course you'll have to pay ordinary income, but not the 10% penalty tax. If you roll it over to an IRA rollover, you cannot touch it in any way that you want, without the 10% penalty until you attain the age of 59 a half. These are the little things that bother me. And they bother me because these little things can add up to a lot of money. Next, I just want to say one other thing about IRA rollovers. Many of your places where you work, they will allow you to keep any money you want, as long as it's over $5,000 in most cases in your 401k or 403B plan that you already have. Should you leave it there, or should you roll it over? Here’s again something I just want you to think about. I would much rather you leave it in your old employer's retirement plan, as long as you know that the expenses are very low, and you're familiar with how it works. I’d rather you stay there safe and sound, then roll it over to some brokerage firm, and get in the hands of some financial advisor, who all of a sudden has convinced you to do this, and to do that, and do this and that with it. A lot of the things that don't make sense. And now you're in a situation where you write me and I have to point out to you the big mistake that you made, and you just feel horrific about it, but there's nothing you can do about it. So again, I'm going back on some of the advice that I've given you now that I'm reading your emails, it's not just an automatic thing that once you retire from a place you're no longer working at an old employer’s place, and you have a retirement there, it's no longer given that you just do an IRA rollover with it. We have to really think about it. Do you make too much for a contributory Roth? And are you going to want to do a contributory Roth? But you have to do a backdoor Roth, then you don't want to do an IRA rollover. Do you not know what to do with money? So you're afraid and you feel more secure, leaving it at your old employers place. Great. Leave it there, as long as the expenses are reasonable. So, again, I love this podcast, and I love all of you so much it's not even funny, but there is no advice that fits every single one of you out there. Every one of you is special. Every one of you is in a different situation. So please just take that into consideration when you're hearing the things that I want you to do. All right, I can go on and on. But I have a feeling that your head is spinning. So maybe I'll just call this podcast, Let's Go to Suze School. Here are the things that Suze needs you to know, so that you are educated, so that you don't make mistakes, so that you really can be the smart, strong and secure women that I want you to be.
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