Retirement, Roth, Roth IRA, Student Loans
August 08, 2021
Listen to Podcast Episode:
Today, we go to Suze School on the major differences between a ROTH IRA and ROTH 401(k)s and why the ROTH IRA is the better choice. Plus, we get an update on the eviction & student loan moratoriums.
August 8th, 2021. It always still, every time I do a date, it amazes me how fast time is going. However, a lot has changed since last Sunday's podcast. So, I want to start today's podcast, which is going to be a Suze school. I want to start today's podcast though with the updates that you need to know about what happened this week. The first thing that happened that I love that has happened, is that they have extended the eviction moratorium to October 3rd of this year. But in extending it, I just want to say this to everybody. There is going to come a day when they're not going to extend it any more. So, somewhere right now, right now while you have time and you know what your situation is. You have to take action now. I don't know what that action is going to be. I don't know what you're going to be able to do. But you really have to start seriously thinking about it because there will come a day when this eviction moratorium is over. But for now, I'm just so happy that they extended it, right, that's number one. The next thing you need to know Is that President Biden has extended the moratorium on student loan payments. So, starting next month you're going to have to start repaying your student loans, your federal student loans. But now they have been extended where you do not have to pay until starting after January 31st of next year. But again, that date will come and I hear that he has said there will be absolutely no more extensions after that. So, should you be paying your student loan or should you not, should you wait to see if President Biden is going to dismiss your student loans or should you not? Here's what I think and I've said this before, even though I know that many people are pushing for $50,000 reprieve meaning that $50,000 of your student loan will be forgiven. I just don't think that's going to happen. Do I think $10,000 is possible? Oh, you bet I do. So, if you knew that student loan forgiveness was upcoming in just another month and you were planning to make payments and you owe more than 10,000, especially if you owe more than 50,000. Can you start making those payments? Because the interest rate is at 0% and put that towards all of it towards your principal so that you do pay down your student loan faster. Because there's no way, like I said, they're going to forgive more than $50,000. They're not going to forgive all of it. So, be smart with this time that the government is absolutely giving you. If you owe $10,000 or less, well, you might want to wait just to January and see what happens. Because they may very well forgive up to $10,000 between $10 and $50,000. I don't know it's going to be up to you. But if it were me, I'm not a gambler. I take advantage of a situation when I see it and to make payments at 0% knowing that I was going to have to start to make those payments anyway. I would probably start to pay down the $50,000 and see what happens. All right. The other update is that you should know that the supplemental unemployment benefits that a lot of you are getting the extra $300 a week or whatever it is, is due to go away everywhere on September 6th. Now it may be extended. It may not be the fact that we just had a low unemployment rate doesn't help much, but you need to prepare for that. Just don't keep thinking that these saving techniques are going to be in place forever and that's what's allowing you to make it. You have to find a way somehow to make it on your own. Again, I don't know how it's hard because the pandemic is rearing its little head again. But you have to face reality. And so, those are the three things that I just wanted to give you updates on. The next serious update though, is this, you best all tune in to ask Suze and KT anything this coming Thursday because it's on this Thursday that we are going to give you the details of the sweepstakes with Alliant Credit Union. I'll just give you a little sneak preview. One of you is going to possibly win a $10,000 grand prize and I will be doing a one-on-one makeover with you. One of you will win second place. But that will be a $5,000 prize and five of you, the third-place winners will win $1,000. Now, I'm going to go more into detail with this but it's absolutely incredible. And I'll tell you why on Thursday, if you haven't done an Alliant Credit union account yet, you want to, you want to, you want to? All right enough said there. So, KT and I did this podcast last Thursday and we laughed and had such a great time, especially at the ending. And I got some emails sent in to firstname.lastname@example.org. That's where all of you can absolutely email me and I will read it. And you said, you know, Suze money is a very serious thing. You need to take it more seriously. I take it really seriously and when you guys start to laugh, it absolutely distracts me and takes me off. Point really, is money really meant to be serious. I think one of the reasons that a lot of you stray away from dealing with your money and doing that what you know, you should do with it is that everybody has made it just seems so formal, so strict, so rigid, so understandable. There's really no human element about it. I mean when you watch CNBC and you watch all these financial shows, they're also like stiff on some level, it's all like they talk a foreign language as these letters and numbers go across the bottom of the page and like what do they mean? And all these terms that you've never heard of before? Well, I can tell you one thing, all of you can relate to laughter and if you can't relate to laughter, then you have to look within to see why not. Laughter is a universal joy. That when one person really starts to laugh, it usually starts many people laughing and nobody even knows why they're laughing and it feels great to laugh. And for the most important topic of your life, important and important is different than serious. Serious means, it's, you know, it's rigid, it's serious. This is serious people. But rather than serious, I wanted to be important to you. I wanted to matter to you. I want you to want to do it and everybody wants to have a good time. Everybody wants to understand. Everybody wants to feel validated. Everybody wants to be heard. Everybody wants to know what they say matters to somebody else. And when you hear KT and me laughing, it's so great. And rather than thinking that it negates all the important things that we have said to you or I've said to you sometimes KT says it, but all right. But that would have said to you about money, shouldn't be negated, shouldn't be a distraction to you. What it should be is, if it bothers you, in my opinion, is to look at yourself and go, why does somebody laughing bother you? Do not have joy in your life? Do not have laughter in your own life. Do you think that money is something where laughter doesn't belong? One of the greatest joys in my life is money. It brings not only pleasure obviously to me. Not only does it help me do whatever I want and need to do, but it also allows me to help others do what they need and want to do as well. So, it brings tremendous joy to me. There's nothing serious about it. It's important to me, but it's not a downer. It's something that really should uplift you and make you feel better. So, I just wanted to say that. All right, So, now let's go to Suze School last Thursday and asked Suze and KT anything, KT chose to do an entire podcast on retirement accounts. And there was one question in there that was about, should I do a Roth 401K that does not match my contribution versus a Roth IRA, which one is better? And I said a Roth IRA, hands down. If there was a match, it would have been a different answer. But that was the total answer to that question. And a few of you, one person in particular wrote in and said Suze Orman, I could not disagree with you more, if I tried. There's absolutely no difference between a Roth 401K in withdrawing your contributions versus a Roth IRA, If I put $25,000 over all these years into my Roth 401K, and I wanted to take out my $25,000, I could do it without any taxes or penalties whatsoever. And that's the exact same thing with the Roth IRA Suze. So, why would you say a Roth IRA is better. Now sometimes, a little information can be very, very dangerous. So, you really have to understand the rules and regulations of a Roth 401K. And why I like a Roth IRA a better, if your Roth 401K doesn't match or after the point of the match. And for those of you who don't know a match is, you put in a dollar into your retirement account with your employer and your employer matches your contribution and we'll put in a dollar or 50 cents or 25 cents. Some match up to usually 6% of your base pay and then they stop matching. Okay, So, let me really explain to you in detail why a Roth IRA is far better in my opinion than a Roth 401K. That does not match or after the point of the match, any money that you originally put into A Roth IRA, you can take out at any time without taxes or penalties regardless of how long that money has been in the Roth IRA or your age. So, let's say you are 40 years of age and over the years, you've put $25,000 into a Roth and it's now worth $30,000, and you're only in your 40s, okay, you're not 59 a half, which is usually the time that you can take money out of a retirement account without penalties. However, with a Roth IRA, you're in your forties, you've put in $25,000, you have $30,000 in there, you can take out everything up to $25,000 without any taxes or penalties whatsoever. The $5,000 of earnings because the whole account is worth $30,000. That means your money has earned $5,000. That money, the earnings or the $5,000. In this case, you cannot take out without taxes and penalties until you are 59.5 years of age and the account has been open for at least five years. That's how a Roth IRA works. Now, according to this email, this one person thinks that the Roth 401K works identical to that. So, what's the big deal? Well, that's because emailer, you are 100% wrong. It does not work the same way. So, everybody, I want you to listen to this podcast over and over again or write down these numbers. So, you really understand the difference between a Roth 401K and a Roth IRA if you are allowed to contribute to either one. In a Roth 401K, same situation you over the years, you're in your forties, you put in, let's just say $25,000 and today it is worth $30,000. That means $5,000 is earnings. And you just like with a Roth IRA you want to take out $25,000. Are you going to have to pay taxes or penalties on that $25,000? You're not going to have to pay penalties. So, let me tell you exactly how this will work for you over the years you put in $25,000. Those are your contributions, over the years it has grown by $5,000 those are your earnings, for a total of $30,000 in your Roth 401K. To figure out how much of your withdrawal will be taxable in a Roth 401K. You would divide your earnings which in this case is $5,000 By the total amount in your Roth 401K. Which is $30,000. That comes out .166. You then would times. And let's just say you want to withdraw all $25,000, you could take out all $25,000 in your Roth IRA scot free. No problem. But in your Roth 401K. You would multiply the $25,000 that let's just say you want to take out by .166 and that would mean that $4,150 of this, $25,000 withdrawal will be reported as taxable income. That is absolutely not true with a Roth IRA. So, there is a tremendous difference. Are you all understanding there is a tremendous difference between a Roth IRA and a Roth 401K? If you ever think you're going to need to withdraw your contributions, that's number one. Number 2 in a Roth IRA, you never ever have to start required minimum distributions ever. And I talked last week on the podcast about required minimum distributions and required minimum distributions are that for most of you, once you reach the age of 72, you are required to distribute at minimum according to your life expectancy, an amount of money from your Roth 401K, your 401K, all pretax retirement accounts. You are required to do so, now, the only exception, listen closely is if you're still working for your employer, if you're still working for your employer, chances are you might not have to be taking required minimum distributions till you retire. But for the majority of you, you will have to start taking required minimum distributions and that includes a Roth 401K, in a Roth IRA, there are, like I said a little bit ago, no required minimum distributions. So, that's a tremendous advantage seriously to a Roth IRA, over a Roth 401K. So, I think it's really important that you understand the difference is the little subtle differences between a Roth IRA and a Roth 401K or a Roth 403B or whatever it may be. So, again, I'm just going to say hands down a Roth IRA in every single circumstance is far better than a Roth 401K, 403B, TSP, whatever it may be. So, if you have a chance to get money into a Roth IRA and that's how you contribute every single year. If you qualify for income-wise and that is the way that you should go. Now, the truth of the matter is you could have both. There is nothing stopping you from having a Roth IRA and a Roth 401K. Because remember in a Roth 401K, as well as a Roth IRA, once you turn 59.5 and the account has been open for at least five years, everything in that account will be absolutely tax free to you. So, that's really great. Now a lot of you may be thinking Suze, I don't intend to take any money or my contributions out of my Roth 401K. And since after the age of 59 a half and it's been open for five years. Anything that I'm required to take out anyway is absolutely tax free. Why does it matter? It matters everybody because of this. Let's say that you don't need the money that's in your Roth 401K. You don't need it. Wouldn’t you want it to be able to continue to grow and grow tax free for your beneficiaries? So, yes, obviously you could take money from a Roth 401K and do an IRA rollover with it into a Roth IRA and avoid that problem. But a lot of you are afraid to do IRA rollovers for some reason, you just don't want to do it. So, you leave your money at your ex-employer's account because you feel comfortable there. The problem with that is what I just said, you're going to have to start required minimum distributions, in a Roth IRA. If you don't need the money, you never have to take it out. And so, then when you leave it to your beneficiaries, hopefully that money has been growing and growing and growing tax free, So, you have more to leave to your beneficiaries absolutely tax free. That's another difference between a Roth IRA and a Roth 401K. And everybody again, when I say a 401K it applies to any employer sponsored retirement plan, you know, a 403B or a TSP. So, it's important that you understand the differences of those, right? I just want to address one more issue. Another email was sent in and the question was interesting in that it was this, Suze, I've had to retire because my employer was offering retirement that I had to take and I have some nice money in my 401K. That I've never paid taxes on. And my financial advisor is telling me that I should absolutely do an IRA rollover with this money so that, I can have greater diversification. I'm going to have to be living off of this money. So, do you think that is a good idea? So, this is something that all of you need to listen to me carefully especially if you have money in a pre-taxed retirement account at your employer and somebody is telling you to do an IRA rollover with it. This is what you need to keep in mind. There is an IRS rule that's under 72T to be exact that says if you leave service, it doesn't matter if you're fired, you quit, it doesn't matter. If you leave service in the year that you turn 55 or older, any money that you have in your employer sponsored plan, you can withdraw without a 10% penalty. Yes, you're still going to have to pay ordinary income tax on it. But there isn't any penalty on that money. If you roll that money over to an IRA rollover, what happens is you cannot touch that money in any way you want prior to the age of 59.5. If you touch it in any way you want, you are going to pay not only ordinary income tax, you're going to pay a 10% penalty tax as well. So, you have to really know what is your age when you left service of the employer that you left. So, even if you left that employer January of 2021 and you're going to turn 55 on December 25, 2021. It does not matter. You still qualify. So, if you turn 55 or older in the year in the year people you left service than any money that's in your 401K, your traditional 401K because it's pre-taxed. You can withdraw without the 10% penalty. You obviously have to pay taxes on it, but not the penalty. So, why am I telling you this? Because many of you may not be going back to work. Many of you may have money in a 401K plan. And financial advisors are suggesting that you do an IRA rollover with it. But you know that you may need to access some of that money to live on until you can find a job or until Covid is over. Or just to get you buy whatever it may be. So, then you have to think about not doing an IRA rollover and just leaving that money at your ex-employers. Can you do a partial roll over? If you have a lot of money in your 401K and you want to, let's say you have $300,000 in there and you want to roll over $200,000 to an IRA rollover and invest it there and leave $100,000 in your 401K to get you by, okay. But at least you need to know the rules. So, this podcast was an interesting one. Did you find it interesting? Was in that these are the little nuances of things that you have to understand about a Roth 401K versus a Roth IRA leaving money in a 401K versus doing an IRA rollover. Those little things can really make a tremendous difference in your retirement planning. So, that's the Suze School for today. Do not forget Thursday, Thursday we're going to tell you everything you need to know about this alliant sweepstakes on why those of you who have already opened an Alliant credit union account, the ultimate opportunity savings account. You're going to be so happy that you did and you'll still have time to do it, right? So, until Thursday make sure all of you stay safe, stay strong, stay secure. And remember there's nothing that heals a soul faster than a good laugh. Try it out. Alright, See you then.
Take advantage of the Ultimate Opportunity Savings Account with Alliant Credit Union at: https://bit.ly/3vEUTZW
Join Suze’s Women & Money Community for FREE and ASK SUZE your questions which may just end up on her podcast!
To ask Suze a question, download by following one of these links:
CLICK HERE FOR APPLE: https://apple.co/2KcAHbH
CLICK HERE FOR GOOGLE PLAY: https://bit.ly/3curfMI
Credit & Debt, Saving, Investing, Retirement