Podcast Episode - Ask KT & Suze Anything: Can I Give My Child Money and Get a Tax Deduction?

On this edition of Ask KT and Suze Anything, Suze answers questions about why you need an IRA, what to do with inherited cash, trusts and so much more!

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Podcast Transcript:

Suze: June 13th, 2024. Welcome everybody...

KT: Doesn't it feel good to be back?

Suze: KT, we were just gone for one podcast.

KT: But doesn't it feel good to be back in the studio?

Suze: You know what feels good? It feels good to be back in the studio on the island.

KT: That's what feels good. And, but let's tell everybody the whole week is stormy, rainy weather. But guess what? We love that because our grass and our, oh my God, they were all—the whole island was dry.

Suze: But KT. So let me tell you something, everybody. And I said, ok, KT, how should we start today? And she says, let's just get right to it, Suze. We have so many good questions and I said, but people really like when we play.

KT: I'm not gonna play today. I'm gonna play when I ask you questions, but not before when the podcast is first starting.

Suze: So, here I am and I go, June 13th, 2024. And before I could even say, welcome everybody to the...

KT: Isn't it good to be back?

Suze: That's what she does to me.

KT: Let's go.

Suze: Anyway, this is the Women and Money podcast. This is the KT and Suze edition. And for those of you who aren't new to us, this is where you can write in to asksuzepodcast@gmail.com. Ask a question there and if KT chooses it, we'll answer it on this podcast. And for those of you who are wondering and waiting, so am I. As soon as Alliant picks the winner of the $5000, I will let all of you know. But there's always so many legal requirements. So just be patient and I'll be patient with you.

KT: Are you ready?

Suze: All right, I'm ready because I've got great questions. Is it hot in here?

KT: No.

Suze: I'm so hot this morning. You're supposed to say when I say I'm so hot this morning, you're supposed to say...

KT: You're hot every morning. All right. This first question is from Sharon. I started reading this, Suze, and I went—whoa.

KT: Dear KT and Suze, I wish to express my heartfelt thanks to you both for truly changing my life. So, is this a question or a comment?

Suze: It's actually a comment, but more important is what the comment is about.

KT: I like having a comment. Yeah, I do. I like setting the stage, as we say that in the theater, we set the stage. About four years ago, my husband of 25 years refinanced our house without telling me. He then bought a house without telling me, and then took all of our money out of the bank without telling me. He didn't even say one word to our kids about leaving. Needless to say, I was shocked and angry beyond belief. I could never imagine someone I had spent most of my life with could be so conniving and cruel. After 2.5 years of agonizing divorce proceedings, the divorce was finalized. He is now conveniently unemployed and I have received no spousal support in a year.

However, I am a flight attendant who doesn't make a huge salary by any means. But since his departure and working my butt off, I have managed to build a year plus of emergency savings, fully fund a Roth IRA each year, and max out my 401k. I opened investment accounts. I've been able to maintain my home on my own salary. And yesterday, my daughter graduated from college debt free. Both my kids work hard and fully fund their Roths each year as well. Your impact is shaping the next generation, Suze. Thank you from the bottom of my heart.

Suze: You want to know what's so interesting about that, KT? Is that maybe her ex took all the money, conveniently now is unemployed, hasn't paid anything for support. But in the end now, I always say people first then money then things, the lesson that his children have learned is absolutely priceless. Because both of those kids are never ever going to find themselves in a situation and let their spouse do what their father did to their mother. He may have money, but I guarantee you he has lost the love and respect of his children. That's called true emotional bankruptcy. All right, KT, next one.

KT: All right. So next question's from Ashley. And if you all recall, Ashley asked a great "Can I Afford It?" question. And this is why I picked it. It was, "Can I afford a baby?"

Suze: Oh, that was a quizzy, right?

KT: Yes, it was. Now let me read this response to all of you. Dear Suze and KT, thank you so much for answering my question about whether we're financially ready to have a baby. I burst into tears when I heard you say my name on the podcast.

Suze: Ashley, Ashley, Ashley, Ashley, Ashley, Ashley, Ashley!

KT: I was hoping the episode title was referring to my question, and it was so amazing to hear Suze—the woman who taught me basically everything I know about money—address me directly. This was so special. I can't thank you enough. I just turned 34, which makes your advice a bit bittersweet. However, my husband and I both agree that it makes the most sense to wait until we can comfortably meet the benchmarks you laid out. It feels like saving for a home again, and that's incredibly motivating. We appreciate you. I'd love to keep you posted.

Suze: Please, if you end up having a baby and it's a girl, we know you're going to call her Suze. So you know what's funny, Ashley, is that when you say it's like saving for a house all over again—which means you obviously wanted to buy a home, have a home and you had to save for it before you could purchase it—there's a really big difference between a home and a child. A home you can sell. If you don't like it, you can move on, you can keep going no matter what. With a child, it is a forever that hopefully will never end during your lifetime. And the cost of a child is actually almost in many cases equivalent, if not more than the cost of a home. It's an unknown of what can go wrong as well. So I love that you are going to wait and save to make sure that when you finally do have a child, you won't be afraid on any level financially speaking.

KT: Here's my first real question. This is from Marlene.

Suze: Let's see if I can upset KT again. All right.

KT: She's 75. She said, Suze, I'm 75 and very comfortable. I understand I can gift my 50-year-old son $17,000. He has big student loans and I need a tax deduction. Can I pay his bill and take the deduction or should I transfer money from my IRA to my Roth IRA?

Suze: That's actually a complicated one. You thought that was a really easy question, didn't you?

KT: No, I think the first part might be pretty easy.

Suze: Yeah, the first part there—if there's one part, then you can answer that. You can absolutely gift your son or anybody you want—and as many people a year that you want—currently $18,000 a year. However, it's not taxable to them and it's not a tax write-off to you on any level. The fact that he has big student loans is a very, very different question that—where you say, but I need a tax deduction, and can I pay his bills and take a tax deduction? No, you cannot do that. I don't want you to confuse the two.

However, because if you're very comfortable, does it make you uncomfortable when you see your son suffering under a lot of student loans at the age of 50? What must that make him feel like? Because probably most of his friends don't have student loans anymore. So the question isn't, can you pay that bill and get a tax deduction? The question is, can you pay that bill and still be incredibly comfortable at the age of 75 and take that burden off of your son's back? And would that make him happier? Would that help him in any way? And if the answer to that is yes, it would, then that's probably what you should do.

However, if it won't help him, if on some level he's kind of—don't take this the wrong way, Marlene—but he's kind of like a financial loser, he's just, you know, not really doing the things he should be doing and maybe still living at home with you, whatever it may be—

KT: Suze just gave me a look, everybody.

Suze: But it's me. So it's true. There are many kids that are financial losers, KT. They just are. Anyway, then would you just be wasting that money if you were to pay off his bills? And would it just have gone to waste on some level? You—and you alone—have to decide that.

As far as transferring your money from your IRA to a Roth IRA, you are the age of 75. You have required minimum distributions that are coming out of your traditional IRA. So just remember, you have to take your RMDs before you can convert any money to a Roth IRA at the age of 75. Does it make sense to do it? I'm not sure it does or it doesn't, but you might want to contact your CPA and see what he or she says.

KT: So, Suze, I have a question for you. You know the question I'm gonna ask you. Why does it bother you when I simply say maybe he's a financial loser? Why does that bother you?

Suze: Well, because the first answer was so nice—to take the burden off his back. Would it make him happier? Would it make you happier? And then bam, you flip the coin and say on the other hand, your son may be a real financial flake, right?

KT: So what's wrong with that?

Suze: Well, nothing's wrong with it, but it was so nice in the beginning. I was so happy. I was happy for her and him...

KT: If that had been true.

Suze: Well, let's hope. Let's hope the part A is the truth, not part B. I hope—I hope that Marlene has the courage to stand in her own truth, no matter which one of those things it happens to be, because she's okay no matter what. Next question.

KT: This is from Peggy.

Suze: Let's see if I can upset KT again. All right.

KT: She says, "Embarrassed. Hi, Suze and KT. I've been watching and listening for over 10 years, but I'm getting ready now for retirement in the next two years. What is the purpose of moving my 401k and 403b into an IRA? I feel so knowledgeable because of you, but I am embarrassed to say, I don't quite know how to retire."

Suze: I am so tempted to say—KT, I know we normally wait to the end of the Ask KT and Suze Anything podcast for a quizzy. But guess what? Pop quizzy, KT.

KT: Right now?

Suze: Right now. On this question. Everybody, how would you answer this question? Why have I, for years, been saying to most of you that once you decide to retire, you should look into—if you have a traditional 401k or 403b or even a Roth 401k or a Roth 403b—look at transferring it or rolling it to an IRA or a Roth IRA? Why, KT?

KT: Well, when you transfer the traditional into your Roth...

Suze: No. You would transfer a traditional 401k to a traditional IRA. It's got to go from pretax to pretax or she's gonna pay taxes on everything.

KT: But if it's a Roth... No, don't get confused. I don't know.

Suze: No, that's it. You just don't know.

All right, everybody, especially Peggy—and thank you for this question slash quizzy. If you have your money at a 401k or a 403b, which is usually a nonprofit, KT—it is with your employer. And normally a 401k plan or a 403b plan only has a specific number of investments. And most of those investments consist of only the company stock that maybe you're working for, but mutual funds. Maybe they have a variety of mutual funds, but that's it.

When you transfer it and put it into an IRA, now you can buy exchange traded funds, individual stocks, you could buy certificates of deposits, you could buy treasuries, you could buy so many different things. And you could probably even buy the exact same things that the 401k is invested in. So the reason that I tell everybody to transfer it when you leave is so that you can have more diversification.

As you get older, maybe you're gonna want to put money into individual bonds. You can't buy individual bonds within a 401k or 403b. You could only buy bond funds. And everybody knows I hate bond funds. So therefore, I hope Peggy, that has answered your question.

However, let's say you have a sizable sum of money within the 401k or 403b. Let's just say that's true. And you're comfortable with your investments. You feel secure there and now you don't want to transfer it because maybe you have to cash it out, even though in most cases you won't have to. But let's just say you did. And now you have $800,000 of cash sitting at a discount brokerage firm like Fidelity or Schwab. And now you have to invest it and you don't have a clue how to do that. So you're scared to death. If that's the situation, then hey, leave it in the 401k or the 403b.

KT: Ding, ding, ding, ding, ding, ding, ding. That was good. Right to do that. Well, I didn't realize that the reason—the biggest reason—is that you have a great deal of choice and diversification.

Suze: That's the only reason.

KT: OK. This is a great—this, I read this question and I'm thinking to myself, wow, what would I do? What would Suze do?

Suze: One of my favorite things is that sometimes we'd be in a restaurant, everybody, or even a bookstore and I'd be standing in line to get a book and people would be in front of me and they had my book in their hand or on an airplane and I would hear them talking, like they'd usually be with a friend and they would always say, what do you think Suze would do? What would Suze do?

KT: Well, here's a good one. Right.

Suze: And then KT, I would lean over and I go, well, I'll tell you what I would do. And they'd always go ahhh!

KT: Yeah, it's her, it's her, it's her. All ready. This is from Pat and Pat said, good morning, Suze.

Suze: It is.

KT: Here's our question. What should a person do when they find a large amount of money in the home of loved ones who have passed?

Will the bank question a large deposit? I think the bank would be the safest place. Now, what would Suze do?

Suze: Well, Suze, as many of you may know, actually read a lot of these questions and I wrote this person back and I said, how much is a large sum of money?

KT: Did they tell you?

Suze: Yes. And they wrote back and they said $200,000.

KT: Someone stashed cash.

Suze: Her father didn't really believe in debt. He didn't really believe in banks and little by little, he would take his paycheck and everything and he would just stash it in the house in cash. And now she has found it. So the question is, what would Suze do.

First of all, you have to realize that $200,000 is a lot of money. And if you just let it sit there in cash, you're missing out on about $10,000 a year currently in interest. That's number one.

But number two, the very first thing I would do is if you have a lawyer that was settling the estate for your father, maybe he had a home that needed to go through probate or whatever. I would first consult with him or her and ask for their opinion. Chances are what they are going to tell you to do—and if you don't have one, you might want to find one and just consult with them—but would be to find a bank, either the bank that your father was dealing with, but maybe he didn't have a bank, but maybe you have a bank where you have connections with that bank. Because if you ever deposit $10,000 or more at one time, they're going to report it. And they're going to report it because that's a lot of money. If you deposit $200,000 at one time, oh, there are gonna be a whole lot of questions.

So you should take the death certificate, his will or trust, showing everybody that you're the beneficiary of everything and that you found this money while getting your father's house in order to sell or whatever reason you are looking through this stuff and just come clean. Now, maybe they'll make you pay taxes on it. You never know. Maybe they'll say, oh, ok, because he never had a bank account or whatever. They'll understand that and they'll just let you have it. But it should probably be if you go to a bank that you open up an account, not in your name but in the estate of your father. So it sits in that account. So then it becomes part of the estate. That is a very simplistic thing of what Suze would do. All right, KT, next question.

KT: All right. This is from Lou. Suze, should we include our rental property that is paid for in our living trust?

The property provides us an additional monthly income of $2,550.

Suze: One has nothing to do with the other.

KT: Listen to this. We were not going to include our primary home in the living trust.

Suze: And why the heck do you even have a living trust?

KT: We are both 70 plus years old. So explain to Lou about why there's a trust.

Suze: The main reason that you want a trust is so that your home, your rental property, things that really don't have a transfer of title like a life insurance policy—you have a beneficiary of that, doesn't go through probate. Your retirement accounts have a beneficiary, doesn't go through probate. Right? And I'm not a fan, by the way, of having a trust be a beneficiary of a retirement account, as I have told you many times. But it's very difficult with a home.

The main way you avoid probate with a home is you own the home in joint tenancy with right of survivorship. But then when the person you left it to dies, does it go through probate?

And remember, when a home goes through probate, it's not how much you owe on the home, it's how much it's worth. So for instance, if you have a $500,000 home and you still owe $250,000 on that home, all $500,000 is going to go through probate. And depending on what state you're in, probate can be really, really expensive.

So Lou, you need to understand why do you have a trust? What are your reasons for not having your home and rental property within the trust? It doesn't affect your income taxes on any level. It's the exact same as if you have a trust—like KT and I both have trusts—and we pay the same income tax whether we had a trust or we didn't have a trust. What happens, however, is what happens to that money when something happens to us.

KT: It sounds like Lou didn't understand that he could have both of these in his trust. But it sounds like he was trying to tell us he decided not to put his primary home in it. Just put as many assets as...

Suze: It's not just about the probate. It's about incapacity. If something were to happen to you and you don't die, who pays your bills, Lou? Who writes your checks? Who makes sure that the mortgage and the insurance and everything is paid?

That's why you want a trust that has an incapacity clause. And for those of you who are asking, the must-have docs are back on sale. All you have to do is go to musthavedocs.com and you will find them—$2,500 worth of state-of-the-art documents for $99. All right, KT. Next question.

KT: All right. This is from Lou. Suze, should we include our rental property that is paid for in our living trust?

The property provides us an additional monthly income of $2,550.

Suze: One has nothing to do with the other.

KT: Listen to this. We were not going to include our primary home in the living trust.

Suze: And why the heck do you even have a living trust?

KT: We are both 70 plus years old. So explain to Lou about why there's a trust.

Suze: The main reason that you want a trust is so that your home, your rental property, things that really don't have a transfer of title like a life insurance policy—you have a beneficiary of that, doesn't go through probate. Your retirement accounts have a beneficiary, doesn't go through probate. Right? And I'm not a fan, by the way, of having a trust be a beneficiary of a retirement account, as I have told you many times. But it's very difficult with a home.

The main way you avoid probate with a home is you own the home in joint tenancy with right of survivorship. But then when the person you left it to dies, does it go through probate?

And remember, when a home goes through probate, it's not how much you owe on the home, it's how much it's worth. So for instance, if you have a $500,000 home and you still owe $250,000 on that home, all $500,000 is going to go through probate. And depending on what state you're in, probate can be really, really expensive.

So Lou, you need to understand why do you have a trust? What are your reasons for not having your home and rental property within the trust? It doesn't affect your income taxes on any level. It's the exact same as if you have a trust—like KT and I both have trusts—and we pay the same income tax whether we had a trust or we didn't have a trust. What happens, however, is what happens to that money when something happens to us.

KT: It sounds like Lou didn't understand that he could have both of these in his trust. But it sounds like he was trying to tell us he decided not to put his primary home in it. Just put as many assets as...

Suze: It's not just about the probate. It's about incapacity. If something were to happen to you and you don't die, who pays your bills, Lou? Who writes your checks? Who makes sure that the mortgage and the insurance and everything is paid?

That's why you want a trust that has an incapacity clause. And for those of you who are asking, the must-have docs are back on sale. All you have to do is go to musthavedocs.com and you will find them—$2,500 worth of state-of-the-art documents for $99. All right, KT. Next question.

KT: OK. My final question, short and sweet. Does the income I earn from interest or capital gains from selling a stock held less than a year count towards the $146,000 income before I have reduced Roth contributions?

That's from Wayne.

Suze: Do you want another quizzy?

KT: Well, all right. Let me see. Hold on. All right, everybody. Let me see if I can redeem my lack of knowledge here. Does the income I earn from interest or capital gains from selling a stock held less than a year count towards the $146,000 that I held less than... I think that the answer is whatever income you have when you reach that limit, that's the limit. Doesn't matter when.

Suze: That's not the question.

The question is, if this person has held a stock for less than a year—obviously outside of a retirement account—and they sell it, does that gain count towards the calculation of income where the max is $146,000 for a single person?

KT: Do you want me to answer it?

Yeah, I think it does. I think it does. I think—yeah, all I know is, in America, whatever money you make is your income.

Suze: Not actually, however, but it is true. When you sell a stock that you have held for less than one year, Wayne, that's taxed to you then as ordinary income. Right. So yes, it counts towards your income. Even if it's a capital gain, the way they figure capital gains, it gets figured in with your income and all of that. So either way, it probably would. But definitely in this situation, it will count towards that $146,000 of modified adjusted gross income.

KT: What are you eating?

Suze: It's a cough drop for my throat.

KT: Do you have a sore throat?

Suze: It's not sore, but it's a little dry.

KT: It's dry, huh?

Because I've been swimming in the ocean with Suze every day till we got this bout of rain. But we better sign off. It's late. We're over our limit here, everyone.

Suze: Oh, actually, KT, we're the bosses. So we make the limit be whatever we want it to be. However, there's really only one thing that we want you to remember when it comes to your money. What is that KT?

KT: People first, then money, then things. And if you follow that guideline...

Suze: And if you stay safe, you will be—what?

KT: Unstoppable.