1 00:00:03,049 --> 00:00:03,980 Music: Music In. 2 00:00:30,090 --> 00:00:35,279 Robert: April 16th 2023. Hi, everybody. This is Suze's producer Robert 3 00:00:35,290 --> 00:00:38,299 Robert: and welcome to the Women and Money podcast and Everyone's 4 00:00:38,310 --> 00:00:41,180 Robert: smart enough to listen. I have a couple of things 5 00:00:41,189 --> 00:00:43,839 Robert: to tell you before we get into the heart of 6 00:00:43,848 --> 00:00:48,659 Robert: today's podcast. The first one is that Suze's under the weather, 7 00:00:48,869 --> 00:00:51,889 Robert: she has a serious cold which she caught at Easter 8 00:00:51,900 --> 00:00:53,959 Robert: so to be safe, we are going to rest her 9 00:00:53,970 --> 00:00:55,340 Robert: voice for today. 10 00:00:55,770 --> 00:00:57,979 Robert: The second thing that I want to tell you about 11 00:00:57,990 --> 00:01:01,500 Robert: is that this Thursday, April 20th, we're going to do 12 00:01:01,509 --> 00:01:05,110 Robert: a new Suze School podcast and then KT will join 13 00:01:05,120 --> 00:01:09,419 Robert: the show next Sunday, April 23rd. And we'll do Ask 14 00:01:09,430 --> 00:01:12,919 Robert: KT and Suze Anyhing on that day. Now, we're doing 15 00:01:12,930 --> 00:01:16,239 Robert: this little switch up so that you have information and 16 00:01:16,250 --> 00:01:20,300 Robert: time to make your I Bond decisions before May. 17 00:01:20,849 --> 00:01:24,738 Robert: All right, for today's Suze school, we are revisiting a 18 00:01:24,750 --> 00:01:29,660 Robert: lesson from February 6th 2022. About the five year rule 19 00:01:29,669 --> 00:01:33,599 Robert: for Roths you see so many of you are still 20 00:01:33,860 --> 00:01:37,730 Robert: writing Suze with questions about the five year rule, but 21 00:01:37,739 --> 00:01:40,940 Robert: Suze felt it was time to bring this particular lesson 22 00:01:40,949 --> 00:01:44,119 Robert: back to the top of your feed. And she asked 23 00:01:44,129 --> 00:01:46,480 Robert: me to tell you to get out your Suze notebooks 24 00:01:46,489 --> 00:01:49,220 Robert: and pay attention. All right, here we go. 25 00:01:49,980 --> 00:01:52,830 Suze: First of all, I just want to talk about Roth 26 00:01:52,839 --> 00:01:55,809 Suze: I R A's retirement accounts for a second. 27 00:01:56,800 --> 00:02:00,230 Suze: I have told you forever that I really believe from 28 00:02:00,239 --> 00:02:03,489 Suze: the bottom of my heart that a Roth retirement account 29 00:02:03,500 --> 00:02:09,529 Suze: is the absolute best retirement account out there. Bar none. 30 00:02:10,008 --> 00:02:14,259 Suze: And many of you always say to me, no, Suze, 31 00:02:14,270 --> 00:02:17,940 Suze: I'm in a high tax bracket. I'd rather invest in 32 00:02:17,949 --> 00:02:22,350 Suze: a traditional IRA or retirement account. Get a tax write 33 00:02:22,360 --> 00:02:25,918 Suze: off now and then later on in life, I'll be 34 00:02:25,929 --> 00:02:28,919 Suze: in a lower tax bracket and take my money out 35 00:02:28,929 --> 00:02:29,500 Suze: then 36 00:02:30,399 --> 00:02:35,350 Suze: A Roth retirement account is a retirement account that is 37 00:02:35,360 --> 00:02:40,388 Suze: funded with after tax money. You've already paid taxes on it. 38 00:02:41,070 --> 00:02:45,668 Suze: A traditional retirement account is a retirement account that you 39 00:02:45,679 --> 00:02:50,080 Suze: have never paid taxes on the money that you put in. 40 00:02:50,250 --> 00:02:54,440 Suze: It's pre taxed and how that comes to play later 41 00:02:54,449 --> 00:02:58,720 Suze: on in life is in two ways. Number one, 42 00:02:59,490 --> 00:03:02,820 Suze: let's say you're 65 years of age or older 43 00:03:03,440 --> 00:03:05,168 Suze: and now you're on Medicare, 44 00:03:06,000 --> 00:03:09,770 Suze: the money that you take out from a traditional retirement 45 00:03:09,779 --> 00:03:10,250 Suze: account 46 00:03:11,210 --> 00:03:17,899 Suze: will count towards income and probably increase your Medicare B premiums. 47 00:03:19,258 --> 00:03:22,710 Suze: Social Security. You're now taking social security, 48 00:03:23,830 --> 00:03:27,559 Suze: possibly the income that you take out from a traditional 49 00:03:27,570 --> 00:03:32,259 Suze: retirement account will make it so that your Social Security 50 00:03:32,270 --> 00:03:34,000 Suze: becomes taxable. 51 00:03:34,850 --> 00:03:38,100 Suze: And last, but not least when you die, it's not 52 00:03:38,110 --> 00:03:39,820 Suze: if you're going to die, it's when... 53 00:03:40,479 --> 00:03:43,899 Suze: any money that you leave to your beneficiaries in a 54 00:03:43,910 --> 00:03:48,330 Suze: traditional retirement account, when they take it out, 55 00:03:49,089 --> 00:03:53,089 Suze: then they will pay ordinary income tax on it. And 56 00:03:53,100 --> 00:03:56,100 Suze: maybe they are in a huge tax bracket because they're 57 00:03:56,110 --> 00:03:59,479 Suze: making a lot of money at that point in time, 58 00:03:59,500 --> 00:04:04,429 Suze: a Roth IRA or any Roth retirement account, if you 59 00:04:04,440 --> 00:04:09,160 Suze: follow the five year rules, everybody, and that's included for 60 00:04:09,169 --> 00:04:12,149 Suze: inherited Roth retirement accounts, 61 00:04:13,210 --> 00:04:18,420 Suze: avoid the increase in Medicare B premiums to you. Avoid 62 00:04:18,428 --> 00:04:22,660 Suze: your income going up. And so therefore your Social Security 63 00:04:22,720 --> 00:04:27,299 Suze: may not increase in taxes or be taxed at all. 64 00:04:27,529 --> 00:04:32,178 Suze: And your beneficiaries get to inherit it again. As long 65 00:04:32,190 --> 00:04:37,399 Suze: as they know the five year rule. Absolutely tax free. 66 00:04:38,459 --> 00:04:42,480 Suze: I think those are big deals. But to make the 67 00:04:42,488 --> 00:04:47,269 Suze: Roth retirement accounts really be as beneficial as they are 68 00:04:47,279 --> 00:04:51,429 Suze: meant to be. You have to understand the five year rule. 69 00:04:51,440 --> 00:04:55,630 Suze: So what is the five year rule? It's very simple. 70 00:04:56,339 --> 00:05:02,140 Suze: You just have to open up a Roth retirement account 71 00:05:03,200 --> 00:05:07,209 Suze: and if you open it up and it is opened 72 00:05:07,220 --> 00:05:11,890 Suze: for at least five tax years, and I'll explain tax 73 00:05:11,899 --> 00:05:12,890 Suze: years later on 74 00:05:13,649 --> 00:05:17,399 Suze: if it is open for at least five tax years, 75 00:05:17,760 --> 00:05:21,700 Suze: then you have met the five year rule. 76 00:05:22,510 --> 00:05:29,709 Suze: Just that simple and therefore later on in retirement or 77 00:05:29,720 --> 00:05:33,910 Suze: whenever you are over 59 and a half, even though you 78 00:05:33,920 --> 00:05:35,040 Suze: are working 79 00:05:35,730 --> 00:05:42,029 Suze: any money you withdraw from this Roth IRA will be withdrawn, 80 00:05:42,040 --> 00:05:45,339 Suze: tax free and penalty free. 81 00:05:46,589 --> 00:05:49,820 Suze: So you need to understand that's simply what the five 82 00:05:49,839 --> 00:05:51,519 Suze: year rule says. 83 00:05:52,890 --> 00:05:54,859 Suze: So let's begin. 84 00:05:55,640 --> 00:06:03,549 Suze: There are two different types of Roth retirement accounts. There 85 00:06:03,559 --> 00:06:07,488 Suze: are individual ones, ones that you open up on your 86 00:06:07,500 --> 00:06:08,070 Suze: own 87 00:06:08,700 --> 00:06:11,988 Suze: and then there are ones that you open up with 88 00:06:12,000 --> 00:06:17,799 Suze: your employer. A Roth 401k, a Roth 403b, a Roth 89 00:06:17,809 --> 00:06:23,799 Suze: TSP right now, I'm only going to be talking about 90 00:06:23,950 --> 00:06:30,809 Suze: individual Roths. I'll get to 401ks etcetera in a little bit. 91 00:06:31,920 --> 00:06:38,059 Suze: When you're talking about an individual Roth. There are two 92 00:06:38,070 --> 00:06:39,950 Suze: different types as well. 93 00:06:40,700 --> 00:06:48,219 Suze: There is a contributory Roth and a converted Roth. Then 94 00:06:48,230 --> 00:06:52,089 Suze: I want you to write those two words down. 95 00:06:53,250 --> 00:06:57,618 Suze: A contributory Roth and a converted wrath. 96 00:06:58,399 --> 00:07:03,119 Suze: And the five year rule works differently, if you have 97 00:07:03,130 --> 00:07:07,368 Suze: a contributory Roth versus a converted Roth. 98 00:07:08,230 --> 00:07:11,119 Suze: What is a contributory Roth? 99 00:07:11,760 --> 00:07:16,549 Suze: A contributory Roth is very simple. You open up a 100 00:07:16,559 --> 00:07:18,170 Suze: Roth IRA 101 00:07:19,029 --> 00:07:25,070 Suze: and every year or whenever you want, you contribute to it, 102 00:07:25,179 --> 00:07:28,768 Suze: you don't have to contribute to it more than once. 103 00:07:28,779 --> 00:07:32,779 Suze: You can open up a contributory Roth put in $100 104 00:07:32,790 --> 00:07:37,230 Suze: and never contribute to it again. Ok. But you contributed 105 00:07:37,239 --> 00:07:41,309 Suze: to it with money, you have already paid taxes on 106 00:07:41,970 --> 00:07:48,079 Suze: A converted Roth is a Roth where you first opened 107 00:07:48,089 --> 00:07:49,980 Suze: a traditional IRA. 108 00:07:51,130 --> 00:07:55,399 Suze: A traditional IRA again is money that you have never 109 00:07:55,410 --> 00:07:56,940 Suze: paid taxes on. 110 00:07:57,660 --> 00:08:02,149 Suze: And now you want to convert it to a Roth. 111 00:08:02,190 --> 00:08:06,320 Suze: And when you convert it to a Roth, at that point, 112 00:08:06,859 --> 00:08:10,609 Suze: you will owe income tax in that year on any 113 00:08:10,619 --> 00:08:12,489 Suze: money that you converted. 114 00:08:13,200 --> 00:08:19,190 Suze: Now, there is another kind of converted Roth IRA. 115 00:08:19,970 --> 00:08:24,140 Suze: And many of you out there have what's known as 116 00:08:24,149 --> 00:08:26,899 Suze: a back door Roth IRA. 117 00:08:27,730 --> 00:08:31,779 Suze: And to make it very simple, a backdoor Roth IRA 118 00:08:31,869 --> 00:08:37,539 Suze: is when you don't qualify incomewise for a contributory Roth IRA. 119 00:08:38,169 --> 00:08:43,098 Suze: So you open up a traditional IRA and you fund 120 00:08:43,109 --> 00:08:46,739 Suze: it with money that is not tax deductible. You don't 121 00:08:46,749 --> 00:08:50,939 Suze: take a deduction for it. So it's called a nondeductible 122 00:08:51,039 --> 00:08:56,978 Suze: IRA and then you convert it to a Roth and 123 00:08:56,989 --> 00:08:59,809 Suze: you are allowed to convert it because there are no 124 00:08:59,818 --> 00:09:03,518 Suze: income limitations on conversions. 125 00:09:04,570 --> 00:09:09,239 Suze: So all of you that have a back door Roth IRA, 126 00:09:09,549 --> 00:09:15,359 Suze: you need to know that, that IRA is also considered 127 00:09:15,369 --> 00:09:20,840 Suze: a converted Roth IRA. So you need to understand the 128 00:09:20,849 --> 00:09:27,900 Suze: difference between a contributory Roth IRA and a converted Roth IRA. 129 00:09:29,489 --> 00:09:34,340 Suze: Next, I want you to write down the words contribution 130 00:09:35,369 --> 00:09:37,380 Suze: and the word earnings, 131 00:09:39,080 --> 00:09:40,700 Suze: Contributions 132 00:09:41,349 --> 00:09:46,478 Suze: are made up of money that you contributed to your 133 00:09:46,489 --> 00:09:51,940 Suze: Roth IRA. You're contributing to it with after tax money, 134 00:09:52,659 --> 00:09:59,679 Suze: Earnings, the earnings are the money that the contributions make. 135 00:09:59,690 --> 00:10:04,349 Suze: So you open up a Roth IRA, you invest that 136 00:10:04,359 --> 00:10:09,968 Suze: money in either stocks, exchange traded funds, mutual funds, whatever 137 00:10:09,979 --> 00:10:11,510 Suze: you want to invest in 138 00:10:12,190 --> 00:10:18,118 Suze: and that money earns money. So your contribution earns money, 139 00:10:19,030 --> 00:10:23,979 Suze: those are known as earnings. So it's important that you 140 00:10:23,989 --> 00:10:30,690 Suze: understand that the five year rule works differently with contributions 141 00:10:30,719 --> 00:10:36,679 Suze: versus earnings. So you have to know those two words. Now, 142 00:10:36,690 --> 00:10:41,880 Suze: before I go on, everything that I am talking about 143 00:10:41,890 --> 00:10:48,700 Suze: during this entire section pertains to contributory Roth IRAs only. 144 00:10:48,960 --> 00:10:53,520 Suze: I am not talking about converted Roths during this section. 145 00:10:53,539 --> 00:10:57,608 Suze: I'll let you know when I switch to converted Roths. 146 00:10:59,059 --> 00:11:01,950 Suze: The next two words, I want you to write down 147 00:11:03,159 --> 00:11:07,590 Suze: are penalties and income taxes. 148 00:11:08,320 --> 00:11:14,969 Suze: Now, what you have got to understand is that regardless 149 00:11:14,979 --> 00:11:19,020 Suze: of your age, regardless of how long the Roth IRA 150 00:11:19,030 --> 00:11:20,250 Suze: has been opened, 151 00:11:21,969 --> 00:11:31,579 Suze: penalties and income taxes can never ever ever apply to contributions. 152 00:11:32,010 --> 00:11:33,500 Suze: Why is that 153 00:11:34,650 --> 00:11:40,580 Suze: Because with a Roth IRA, the rule is 154 00:11:41,409 --> 00:11:46,699 Suze: that regardless of how long the Roth has been open, 155 00:11:47,330 --> 00:11:51,650 Suze: you can withdraw your original contributions that you put in 156 00:11:51,750 --> 00:11:57,010 Suze: without taxes or penalties regardless of your age. 157 00:11:57,840 --> 00:12:00,650 Suze: How long the money has been in there, how long 158 00:12:00,659 --> 00:12:05,849 Suze: the account has been open. That money is yours. Why? 159 00:12:05,880 --> 00:12:11,880 Suze: Because a contribution for a contributory Roth is money you've 160 00:12:11,890 --> 00:12:16,650 Suze: already paid taxes on. So they're never going to penalize 161 00:12:16,659 --> 00:12:23,109 Suze: you or tax you on money, you've already paid taxes on. 162 00:12:24,159 --> 00:12:31,809 Suze: So the five year rule does not apply to your contributions. 163 00:12:32,719 --> 00:12:39,549 Suze: Now, let's go on to earnings. When I talk about penalties, 164 00:12:40,090 --> 00:12:45,400 Suze: penalties only apply to earnings if you are not at 165 00:12:45,409 --> 00:12:51,570 Suze: least 59 and a half years of age, when you withdraw 166 00:12:51,580 --> 00:12:52,169 Suze: the money, 167 00:12:53,299 --> 00:12:58,909 Suze: If you are 59 and a half years of age or older, 168 00:12:58,919 --> 00:13:02,989 Suze: when you withdraw your earnings from this account, 169 00:13:04,510 --> 00:13:09,580 Suze: then the penalties do not apply because why? You're already 170 00:13:09,590 --> 00:13:11,880 Suze: 59 and a half or older 171 00:13:12,630 --> 00:13:17,219 Suze: Penalties only apply to age. That's it. 172 00:13:17,909 --> 00:13:22,559 Suze: If you are under 59 and a half years of age 173 00:13:22,570 --> 00:13:30,359 Suze: and withdraw earnings, you will owe a 10% tax penalty 174 00:13:31,719 --> 00:13:34,369 Suze: And it does not matter if it's been in there 175 00:13:34,380 --> 00:13:39,150 Suze: longer than five years, less than five years, you will always, 176 00:13:39,159 --> 00:13:43,159 Suze: if you are under the age of 59 and a half, 177 00:13:43,169 --> 00:13:47,090 Suze: you will always owe a 10% penalty 178 00:13:48,020 --> 00:13:54,239 Suze: on that money. Now, listen to me, obviously, if you 179 00:13:54,250 --> 00:13:58,848 Suze: take money out for a first time home or certain 180 00:13:58,859 --> 00:14:04,150 Suze: things like that for educational purposes, health purposes, there are 181 00:14:04,159 --> 00:14:09,530 Suze: caveats to the penalty rule, the 10% federal tax penalty 182 00:14:09,719 --> 00:14:13,569 Suze: even if you are younger than 59 and a half. But 183 00:14:13,580 --> 00:14:14,669 Suze: in general, 184 00:14:15,030 --> 00:14:19,650 Suze: you need to know that penalties for a contributory Roth 185 00:14:19,659 --> 00:14:22,080 Suze: pertain to age 186 00:14:23,580 --> 00:14:30,090 Suze: Income tax, you will always owe income tax on your earnings. 187 00:14:30,520 --> 00:14:36,369 Suze: If the Roth IRA has not been opened for at 188 00:14:36,380 --> 00:14:43,859 Suze: least five years. So again, income tax and penalties only 189 00:14:43,869 --> 00:14:51,369 Suze: apply to the growth of your contributory Roth never to your contributions. 190 00:14:52,780 --> 00:14:56,869 Suze: So again, I'll just give you an example. You're 35 191 00:14:56,880 --> 00:15:01,309 Suze: years of age, you opened up a Roth this year 192 00:15:02,059 --> 00:15:07,940 Suze: and you put in $6000 which is the max and 193 00:15:07,950 --> 00:15:13,559 Suze: three months later that $6000 is worth 8000. Let's just 194 00:15:13,570 --> 00:15:14,510 Suze: say that's true. 195 00:15:15,450 --> 00:15:21,479 Suze: You can take out anything that you originally contributed $6000 196 00:15:21,489 --> 00:15:28,479 Suze: in this case without taxes or penalties whatsoever, because penalties 197 00:15:28,489 --> 00:15:34,219 Suze: and taxes will never apply to your original contributions. So 198 00:15:34,229 --> 00:15:39,960 Suze: the five year rule is not for your contributions, it 199 00:15:39,969 --> 00:15:43,820 Suze: only applies to earnings. So 200 00:15:44,349 --> 00:15:49,700 Suze: you put in $6000 it's now worth 8000. That extra 201 00:15:49,710 --> 00:15:53,619 Suze: $2000 is your earnings. 202 00:15:54,299 --> 00:15:59,190 Suze: If you take that out before the Roth IRA has 203 00:15:59,200 --> 00:16:02,809 Suze: been opened for five tax years, 204 00:16:03,500 --> 00:16:09,000 Suze: you not only will owe ordinary income tax on that money, 205 00:16:09,400 --> 00:16:14,229 Suze: the $2000 but you will also owe a 10% federal 206 00:16:14,239 --> 00:16:18,359 Suze: tax penalty because you were not at least 59 and a 207 00:16:18,369 --> 00:16:22,070 Suze: half years of age when you withdrew it. 208 00:16:22,919 --> 00:16:24,809 Suze: Just that simple. 209 00:16:25,659 --> 00:16:28,349 Suze: Now, why do I keep saying tax years? 210 00:16:29,640 --> 00:16:41,510 Suze: Because a tax year starts January 1st 2022. January 1st 2021. 211 00:16:41,599 --> 00:16:48,250 Suze: January 1st 2020 it starts January 1st of the year. 212 00:16:49,159 --> 00:16:55,010 Suze: A calendar year is usually one year from when you 213 00:16:55,020 --> 00:16:59,169 Suze: yourself started something. So let me give you an example. 214 00:17:00,340 --> 00:17:02,299 Suze: You open up 215 00:17:03,109 --> 00:17:09,369 Suze: a Roth IRA, December 31st of 2021 216 00:17:10,359 --> 00:17:12,609 Suze: because it's a tax year, 217 00:17:13,298 --> 00:17:16,787 Suze: even though you opened it up on the last day 218 00:17:16,798 --> 00:17:19,009 Suze: of 2021 219 00:17:19,859 --> 00:17:24,409 Suze: it is deemed that, that Roth IRA was opened from 220 00:17:24,420 --> 00:17:30,069 Suze: January 1st of 2021. That's a tax year. 221 00:17:30,729 --> 00:17:37,089 Suze: A calendar year would be, you opened it up December 31st, 2021. 222 00:17:37,250 --> 00:17:45,050 Suze: 1 year would be December 31st 2022. Do you understand 223 00:17:45,060 --> 00:17:50,948 Suze: the difference? Because it's a big deal in understanding how 224 00:17:50,959 --> 00:17:55,589 Suze: long your Roth IRA really needs to be opened 225 00:17:56,329 --> 00:18:02,449 Suze: to qualify for the five year tax rule. One last 226 00:18:02,459 --> 00:18:05,000 Suze: thing before we start your quizzes 227 00:18:06,589 --> 00:18:14,000 Suze: all Roth IRAs the IRS aggregates. What does that mean? 228 00:18:14,780 --> 00:18:20,069 Suze: You opened up a Roth IRA 10 years ago and 229 00:18:20,079 --> 00:18:24,660 Suze: you only were able to put in $100. Now, you're 230 00:18:24,670 --> 00:18:27,639 Suze: making money and you haven't contributed to it for all 231 00:18:27,650 --> 00:18:32,790 Suze: these 10 years. Now, you're working and you're able to contribute. 232 00:18:33,270 --> 00:18:37,899 Suze: So you open up another Roth IRA somewhere else at 233 00:18:37,910 --> 00:18:39,209 Suze: a different brokerage firm. 234 00:18:40,469 --> 00:18:45,369 Suze: Now you start contributing to it because you had originally 235 00:18:45,380 --> 00:18:50,260 Suze: opened up a Roth IRA 10 years ago, your new 236 00:18:50,270 --> 00:18:54,400 Suze: Roth IRA is aggregated with your old one. 237 00:18:55,079 --> 00:18:59,449 Suze: The new one then has already met the five year 238 00:18:59,459 --> 00:19:00,530 Suze: tax rule. 239 00:19:01,280 --> 00:19:06,250 Suze: So that is why the sooner, you can open up 240 00:19:06,260 --> 00:19:10,010 Suze: a Roth IRA even if you can't afford to contribute 241 00:19:10,020 --> 00:19:14,430 Suze: to it. That is when the five year tax rule 242 00:19:14,439 --> 00:19:16,410 Suze: clock begins. 243 00:19:17,280 --> 00:19:23,540 Suze: So you can have as many Roth IRAs as you want. Obviously, 244 00:19:24,060 --> 00:19:27,329 Suze: the maximum that you can contribute per year 245 00:19:28,130 --> 00:19:35,020 Suze: is in 2022 $6000 if you are under 50 $7,000 you 246 00:19:35,030 --> 00:19:38,699 Suze: are 50 or older. So let's say you open up 247 00:19:38,709 --> 00:19:44,139 Suze: five or six Roth IRAs at different places this year, 248 00:19:44,270 --> 00:19:48,640 Suze: the maximum that you can put in is $1000 in 249 00:19:48,650 --> 00:19:51,569 Suze: each one or however much you want to put in 250 00:19:51,579 --> 00:19:54,099 Suze: each Roth IRA, but total 251 00:19:54,939 --> 00:19:58,369 Suze: $6000 altogether. 252 00:20:00,010 --> 00:20:00,619 Suze: Now, 253 00:20:01,369 --> 00:20:06,060 Suze: you have to know that conversions don't work that way. 254 00:20:06,969 --> 00:20:14,149 Suze: Roth IRAs, everything is aggregated conversions, which I'll get to 255 00:20:14,160 --> 00:20:18,099 Suze: in a second again. Do not work that way. 256 00:20:18,790 --> 00:20:22,560 Suze: All right. So do you think that you are ready 257 00:20:22,569 --> 00:20:28,079 Suze: now for your quizzie? Now, I'm gonna try to help 258 00:20:28,089 --> 00:20:33,189 Suze: you to understand what to look for in these questions. So, 259 00:20:33,199 --> 00:20:36,479 Suze: here we go. You are 40 years of age 260 00:20:37,109 --> 00:20:38,839 Suze: and you have contributed... 261 00:20:39,449 --> 00:20:43,319 Suze: Listen to the word contributed. Remember what I told you 262 00:20:43,329 --> 00:20:53,420 Suze: about contributions, $18,000 over the past three years into your 263 00:20:53,430 --> 00:20:54,469 Suze: Roth IRA. 264 00:20:55,329 --> 00:21:00,859 Suze: And now it's worth $20,000 and you want to withdraw 265 00:21:01,000 --> 00:21:04,180 Suze: $10,000 to buy a car. 266 00:21:05,520 --> 00:21:09,389 Suze: So you're 40 you're under 59 and a half. You have 267 00:21:09,400 --> 00:21:15,849 Suze: contributed $18,000. You have $2000 of earnings 268 00:21:17,199 --> 00:21:21,349 Suze: and you want to withdraw $10,000 to buy a car. 269 00:21:21,699 --> 00:21:25,650 Suze: Will you have to pay a penalty and taxes to 270 00:21:25,660 --> 00:21:33,369 Suze: take that money out? Think carefully. A yes. B no. 271 00:21:33,989 --> 00:21:34,750 Suze: Which one? 272 00:21:36,119 --> 00:21:41,930 Suze: The answer is no. And the reason is why? 273 00:21:42,859 --> 00:21:50,569 Suze: $10,000 is less than the $18,000 that you contributed. And 274 00:21:50,579 --> 00:21:54,709 Suze: what did I say to all of you? Your contributions 275 00:21:55,270 --> 00:22:00,609 Suze: are never taxed or penalized no matter what. 276 00:22:01,410 --> 00:22:05,979 Suze: So you can take out your $10,000 in this case 277 00:22:05,989 --> 00:22:11,290 Suze: without taxes or penalties. Now, you may say to me, Suze, 278 00:22:11,800 --> 00:22:15,438 Suze: how do they know that that $10,000 is part of 279 00:22:15,449 --> 00:22:19,718 Suze: my contributions and none of it is part of earnings. 280 00:22:20,849 --> 00:22:27,069 Suze: When you take money out of a contributory Roth first, it, 281 00:22:27,079 --> 00:22:32,448 Suze: there's a rule called first in first out. So first 282 00:22:32,459 --> 00:22:34,629 Suze: your contributions come out. 283 00:22:35,550 --> 00:22:39,300 Suze: Then if you do have any conversions in there, your 284 00:22:39,310 --> 00:22:40,839 Suze: conversions come out 285 00:22:41,400 --> 00:22:46,839 Suze: and next comes your earnings. So the IRS keeps track 286 00:22:46,849 --> 00:22:50,170 Suze: of all of that for you. Hopefully, your brokerage firm 287 00:22:50,180 --> 00:22:53,949 Suze: does as well. So you don't have to worry about it. 288 00:22:54,109 --> 00:22:59,349 Suze: You just need to know the rules. All right. Next question, 289 00:22:59,569 --> 00:23:04,770 Suze: you are 60 and you have contributed 21,000 over the 290 00:23:04,780 --> 00:23:09,469 Suze: past three years. Why 21? Because the maximum 291 00:23:09,969 --> 00:23:12,660 Suze: that you can contribute per year when you are 50 292 00:23:12,670 --> 00:23:17,938 Suze: or older is $7000 a year. So this person contributed 293 00:23:17,949 --> 00:23:23,300 Suze: the max and they contributed 21,000 over the past three 294 00:23:23,310 --> 00:23:25,699 Suze: years into their Roth. 295 00:23:26,810 --> 00:23:32,579 Suze: And now that 21,000 is worth 25,000. 296 00:23:33,930 --> 00:23:40,920 Suze: So $21,000 of contributions, $4000 of earnings. 297 00:23:41,709 --> 00:23:44,780 Suze: And this person wants to withdraw all of it to 298 00:23:44,790 --> 00:23:46,000 Suze: buy a car. 299 00:23:46,729 --> 00:23:51,339 Suze: Well, they have to pay a penalty on any of 300 00:23:51,349 --> 00:23:52,540 Suze: that money. 301 00:23:55,380 --> 00:23:58,650 Suze: Are you thinking about it? Now, notice I said, well, 302 00:23:58,660 --> 00:24:02,109 Suze: they have to pay a penalty. I did not ask 303 00:24:02,119 --> 00:24:05,989 Suze: you if they have to pay taxes and a penalty. 304 00:24:06,020 --> 00:24:08,810 Suze: I asked you if they have to pay a penalty 305 00:24:08,819 --> 00:24:13,459 Suze: on any of that money. They are withdrawing all $25,000 306 00:24:13,469 --> 00:24:15,310 Suze: at once and they are 60 307 00:24:17,459 --> 00:24:21,689 Suze: A. Yes. B no. Think about it, everybody. 308 00:24:23,599 --> 00:24:27,790 Suze: The answer is no. Why is the answer no? 309 00:24:28,550 --> 00:24:33,439 Suze: Because did I not say to you penalties never ever 310 00:24:33,449 --> 00:24:35,879 Suze: apply on any of the money 311 00:24:37,569 --> 00:24:41,119 Suze: if you are 59 and a half years of age or 312 00:24:41,130 --> 00:24:46,859 Suze: older when you withdraw money from your Roth IRA. 313 00:24:48,099 --> 00:24:53,819 Suze: So in this case, this person withdrew $4000 of earnings, 314 00:24:54,630 --> 00:24:57,819 Suze: but they're over the age of 59 and a half. So 315 00:24:57,829 --> 00:24:58,969 Suze: penalties 316 00:24:59,719 --> 00:25:05,650 Suze: never apply to you. Tax penalties if you are 59 and 317 00:25:05,810 --> 00:25:09,609 Suze: a half years of age or older. However, 318 00:25:10,810 --> 00:25:14,290 Suze: what happens in regards to income tax? 319 00:25:15,030 --> 00:25:20,099 Suze: Will this person have to pay income tax on their earnings? 320 00:25:21,810 --> 00:25:24,629 Suze: A yes or B no. 321 00:25:26,270 --> 00:25:28,919 Suze: What are you to look for in this question? This 322 00:25:28,930 --> 00:25:33,399 Suze: Roth IRA has only been opened for three years. 323 00:25:34,369 --> 00:25:41,050 Suze: They have $4000 of earnings. They are now withdrawing the earnings. 324 00:25:41,060 --> 00:25:46,060 Suze: Are they going to have to pay taxes on those earnings? 325 00:25:47,020 --> 00:25:52,609 Suze: The answer is yes. Why? Because this Roth IRA was 326 00:25:52,619 --> 00:25:58,040 Suze: not opened for five tax years at this point in time. 327 00:25:58,270 --> 00:26:02,989 Suze: That is why you have to understand the difference between 328 00:26:03,000 --> 00:26:09,959 Suze: penalties and taxes. Are you starting to understand that? Now, 329 00:26:09,969 --> 00:26:12,670 Suze: I'm gonna get a little bit more complicated. 330 00:26:14,069 --> 00:26:19,319 Suze: You make a contribution to your Roth IRA on April 331 00:26:19,329 --> 00:26:22,319 Suze: 15th of 2022. 332 00:26:22,939 --> 00:26:28,609 Suze: Remember you have until April 15th or whatever the tax 333 00:26:28,619 --> 00:26:32,589 Suze: day is for that year to make a contribution to 334 00:26:32,599 --> 00:26:37,890 Suze: last year's Roth IRA. So you are making a contribution 335 00:26:37,900 --> 00:26:46,790 Suze: on April 15th of 2022 for year 2021 Roth IRA. 336 00:26:47,839 --> 00:26:53,099 Suze: In what year will the five year holding period be up? 337 00:26:54,280 --> 00:26:59,449 Suze: Remember what I said to you about tax years versus 338 00:26:59,459 --> 00:27:01,089 Suze: calendar years. 339 00:27:02,060 --> 00:27:08,089 Suze: So you are making a contribution in 2022. But for 340 00:27:08,099 --> 00:27:11,949 Suze: the 2021 Roth IRA 341 00:27:12,869 --> 00:27:19,280 Suze: is your five year tax year up in A) 2025 342 00:27:19,869 --> 00:27:26,920 Suze: B) 2026 or C) 2027? 343 00:27:28,709 --> 00:27:30,040 Suze: Think about it. 344 00:27:32,310 --> 00:27:41,719 Suze: The answer is a 2025. Why? Because even though it 345 00:27:41,729 --> 00:27:46,750 Suze: was made April 15th of 2022. It was made for 346 00:27:46,760 --> 00:27:49,800 Suze: a Roth in 2021. 347 00:27:50,709 --> 00:27:54,219 Suze: And what did I tell you? It starts the tax year, 348 00:27:54,229 --> 00:28:02,859 Suze: January 1st of 2021. So January 1st 2021 is one year, 349 00:28:02,869 --> 00:28:09,938 Suze: 2022 is two years. 2023 is three years. 2024 is 350 00:28:09,949 --> 00:28:17,079 Suze: four years. 2025 is five years. Now, what's interesting about 351 00:28:17,089 --> 00:28:17,560 Suze: that 352 00:28:18,520 --> 00:28:23,280 Suze: is because the five year holding period is based on 353 00:28:23,290 --> 00:28:25,920 Suze: tax years and not calendar years. 354 00:28:26,660 --> 00:28:32,989 Suze: Even though you made the contribution. April 15th of 2022 355 00:28:33,739 --> 00:28:40,030 Suze: the five year period is up in January 1st 2025. 356 00:28:40,869 --> 00:28:44,479 Suze: That's three years and eight months of a holding period. 357 00:28:45,229 --> 00:28:50,989 Suze: That's less than five calendar years, big time, one year 358 00:28:51,000 --> 00:28:52,989 Suze: and four months less. 359 00:28:54,290 --> 00:28:59,709 Suze: So tax years make a big difference. So you need 360 00:28:59,719 --> 00:29:01,280 Suze: to understand that. 361 00:29:02,510 --> 00:29:05,750 Suze: Let's ask again in a little different way. So I 362 00:29:05,760 --> 00:29:09,160 Suze: know you really get it. You are 62 years of 363 00:29:09,170 --> 00:29:16,500 Suze: age and you have three different contributory Roth IRAs. One 364 00:29:16,510 --> 00:29:22,069 Suze: you open and funded five tax years ago, 13 tax 365 00:29:22,079 --> 00:29:27,869 Suze: years ago and 12 tax years ago. And all three 366 00:29:28,000 --> 00:29:31,420 Suze: have done exceptionally well and made money 367 00:29:32,050 --> 00:29:36,619 Suze: and you want to withdraw everything in all three Roths 368 00:29:37,300 --> 00:29:40,939 Suze: to pay off the mortgage on your home. 369 00:29:41,680 --> 00:29:48,130 Suze: How many of these Roth IRAs can you withdraw all 370 00:29:48,140 --> 00:29:54,729 Suze: your contributions plus earnings without taxes or penalties? 371 00:29:56,280 --> 00:30:02,290 Suze: A) one B) two or C) all three? 372 00:30:03,020 --> 00:30:08,199 Suze: Now, remember what I said about Roth IRAs being aggregated 373 00:30:08,270 --> 00:30:13,979 Suze: even though this person or you have three, Roth IRAs, 374 00:30:13,989 --> 00:30:20,069 Suze: o ne of them was opened five tax years ago. 375 00:30:21,229 --> 00:30:23,359 Suze: So what does that do to the other two that 376 00:30:23,369 --> 00:30:27,920 Suze: were not opened five tax years ago? 377 00:30:29,459 --> 00:30:35,329 Suze: The answer is C all three. And why is that? 378 00:30:36,050 --> 00:30:40,569 Suze: Because number one, you are 62 years of age when 379 00:30:40,579 --> 00:30:45,420 Suze: you are withdrawing everything from this. So remember I told 380 00:30:45,430 --> 00:30:51,060 Suze: you penalties never apply once you are 59 and a half 381 00:30:51,069 --> 00:30:56,160 Suze: years of age or older, that 10% federal tax penalty. 382 00:30:56,800 --> 00:31:00,930 Suze: Why are you not paying income tax on your earnings? 383 00:31:01,189 --> 00:31:07,160 Suze: Because all three Roth IRAs even though they were opened 384 00:31:07,170 --> 00:31:11,890 Suze: at different times because you opened up 15 tax years 385 00:31:11,900 --> 00:31:13,650 Suze: ago or more, 386 00:31:14,290 --> 00:31:20,469 Suze: all three are deemed to be opened up five years ago. 387 00:31:21,189 --> 00:31:25,829 Suze: So that's why it's important again that you open up 388 00:31:25,839 --> 00:31:29,589 Suze: a Roth IRA as soon as you can to start 389 00:31:29,599 --> 00:31:32,400 Suze: the five year tax clock going 390 00:31:33,880 --> 00:31:40,930 Suze: Next, you are 52 years of age and have three 391 00:31:40,939 --> 00:31:46,510 Suze: different contributory. Roth IRAs one. So you have three different 392 00:31:46,520 --> 00:31:51,410 Suze: ones now. One, you opened and funded five years ago, 393 00:31:51,790 --> 00:31:53,530 Suze: 13 years ago 394 00:31:54,510 --> 00:32:00,219 Suze: and 12 years ago, all three have done exceptionally well again, 395 00:32:00,229 --> 00:32:05,000 Suze: made money and you want to withdraw everything in all 396 00:32:05,010 --> 00:32:10,060 Suze: three Roths. How many of these Roth IRAs can you 397 00:32:10,069 --> 00:32:17,359 Suze: withdraw all your contributions plus earnings without 398 00:32:18,109 --> 00:32:20,859 Suze: penalties or taxes? 399 00:32:23,489 --> 00:32:27,660 Suze: A) all of these or B) none of these? 400 00:32:29,390 --> 00:32:31,699 Suze: Remember what I told you about penalties. 401 00:32:34,099 --> 00:32:39,650 Suze: The answer is B you cannot withdraw all of these 402 00:32:39,660 --> 00:32:42,150 Suze: without taxes and penalties, 403 00:32:42,859 --> 00:32:47,630 Suze: especially because you are not 59 and a half years of age. 404 00:32:47,640 --> 00:32:53,290 Suze: So therefore, your earnings not only will get a 10% penalty, 405 00:32:53,459 --> 00:32:57,829 Suze: but they will also be taxed as ordinary income as well. 406 00:32:57,910 --> 00:33:01,150 Suze: If you just wanted to take out your contributions, you 407 00:33:01,160 --> 00:33:05,959 Suze: can do that at any time without penalties or taxes, 408 00:33:05,969 --> 00:33:10,089 Suze: regardless of how long the accounts have been open. 409 00:33:11,359 --> 00:33:14,089 Suze: Now, I want to go on. So I think you're 410 00:33:14,099 --> 00:33:20,910 Suze: now understanding how contributory rots work and how the penalties 411 00:33:20,920 --> 00:33:22,910 Suze: and taxes work. 412 00:33:23,849 --> 00:33:29,800 Suze: Let's go to converted Roth IRAs because those are very 413 00:33:29,810 --> 00:33:30,520 Suze: different 414 00:33:31,209 --> 00:33:36,619 Suze: when you convert money from a traditional IRA to a 415 00:33:36,630 --> 00:33:37,869 Suze: Roth IRA. 416 00:33:38,890 --> 00:33:41,459 Suze: Every time you do so 417 00:33:42,099 --> 00:33:48,390 Suze: you start a new holding period. So unlike a contributory 418 00:33:48,400 --> 00:33:53,489 Suze: Roth that once you establish it, that is the starting 419 00:33:53,500 --> 00:33:57,400 Suze: date from all the Roths you contribute to or you 420 00:33:57,410 --> 00:34:01,270 Suze: start with after tax money from that point on 421 00:34:02,229 --> 00:34:07,640 Suze: with a converted Roth. Every time you convert from a 422 00:34:07,650 --> 00:34:09,580 Suze: traditional retirement account 423 00:34:10,370 --> 00:34:14,560 Suze: to a Roth retirement account. So you're going from a 424 00:34:14,570 --> 00:34:20,899 Suze: traditional IRA to a Roth IRA, you start a new 425 00:34:21,280 --> 00:34:25,909 Suze: time clock, it has nothing to do with the Roths 426 00:34:25,919 --> 00:34:31,479 Suze: that you already have. And by the way, this includes 427 00:34:31,489 --> 00:34:39,279 Suze: a backdoor Roth IRA as well. That is a big deal. 428 00:34:39,550 --> 00:34:43,280 Suze: So if you convert from a traditional IRA to a 429 00:34:43,290 --> 00:34:44,919 Suze: Roth this year, 430 00:34:46,139 --> 00:34:50,479 Suze: you start a new time clock this year. if you 431 00:34:50,489 --> 00:34:55,679 Suze: do another traditional IRA to a Roth next year, the 432 00:34:55,689 --> 00:35:00,560 Suze: time clock starts all over again. It's brand new for 433 00:35:00,570 --> 00:35:06,100 Suze: that year. Also, you have to know that conversions have 434 00:35:06,110 --> 00:35:11,159 Suze: to be made by December 31st of the year, you 435 00:35:11,169 --> 00:35:12,179 Suze: are converting. 436 00:35:12,879 --> 00:35:18,610 Suze: So if you convert December 31st 2021 437 00:35:19,570 --> 00:35:25,439 Suze: the clock then starts January 1st 2021. 438 00:35:27,000 --> 00:35:31,259 Suze: So that's important for you to know as well. Here's 439 00:35:31,270 --> 00:35:37,100 Suze: what's fabulous, however, when you convert a traditional IRA to 440 00:35:37,110 --> 00:35:42,899 Suze: a Roth IRA, you obviously will pay taxes on any 441 00:35:42,909 --> 00:35:44,870 Suze: money that you convert 442 00:35:45,870 --> 00:35:47,040 Suze: that year. 443 00:35:47,729 --> 00:35:51,959 Suze: So you will convert money from a traditional whatever amount 444 00:35:51,969 --> 00:35:55,310 Suze: you want to a Roth, you will owe taxes on 445 00:35:55,320 --> 00:36:00,060 Suze: that money. Typically, the taxes are not due until April 446 00:36:00,070 --> 00:36:03,340 Suze: 15th of the year after you converted. 447 00:36:04,379 --> 00:36:07,389 Suze: So now that money has to stay in there for 448 00:36:07,399 --> 00:36:12,600 Suze: five tax years for you to have met the five 449 00:36:12,709 --> 00:36:17,129 Suze: year rule. What does that allow you to do? It 450 00:36:17,139 --> 00:36:21,830 Suze: allows you now to take out the original amount of 451 00:36:21,840 --> 00:36:23,489 Suze: money that you converted 452 00:36:24,320 --> 00:36:29,770 Suze: without any taxes or penalties, regardless of your age. 453 00:36:31,030 --> 00:36:36,138 Suze: That's important. Let's say that you're in your thirties and 454 00:36:36,149 --> 00:36:40,159 Suze: you really want to be able to access that money. 455 00:36:40,169 --> 00:36:43,139 Suze: Let's just say you do, right or wrong, to start 456 00:36:43,149 --> 00:36:44,340 Suze: a new business. 457 00:36:45,080 --> 00:36:50,790 Suze: So, here you are, you have $10,000 in a traditional 458 00:36:50,840 --> 00:36:54,199 Suze: IRA and you're really not in that high of a 459 00:36:54,209 --> 00:36:56,610 Suze: tax bracket. You're not really making any money. 460 00:36:57,310 --> 00:37:02,560 Suze: If you convert that $10,000 to a Roth IRA 461 00:37:03,350 --> 00:37:08,959 Suze: five tax years later, you can withdraw, even though you're 462 00:37:08,969 --> 00:37:13,279 Suze: not 59 and a half years of age, you can withdraw 463 00:37:13,290 --> 00:37:17,790 Suze: the amount that you converted and paid taxes on without 464 00:37:17,800 --> 00:37:23,040 Suze: any taxes or penalties at that point in time. Why 465 00:37:23,050 --> 00:37:25,659 Suze: is that? Because you pay taxes on it 466 00:37:26,360 --> 00:37:31,469 Suze: So you can get that money in five tax years. 467 00:37:31,969 --> 00:37:38,729 Suze: Just that simple. That's how a converted Roth works. However, 468 00:37:39,729 --> 00:37:43,500 Suze: the earnings still have to stay in there 469 00:37:44,219 --> 00:37:49,370 Suze: until you are 59 and a half years of age to 470 00:37:49,379 --> 00:37:51,189 Suze: avoid the penalty 471 00:37:51,969 --> 00:37:55,110 Suze: and income tax on that money. 472 00:37:56,219 --> 00:38:00,509 Suze: However, listen to me closely. Now again, 473 00:38:01,520 --> 00:38:02,860 Suze: you converted 474 00:38:03,850 --> 00:38:06,760 Suze: and you have this money in that you have just 475 00:38:06,770 --> 00:38:08,279 Suze: paid taxes on 476 00:38:09,310 --> 00:38:13,330 Suze: and now it's three years later, maybe four years later, 477 00:38:13,340 --> 00:38:16,239 Suze: whatever it is, you have not had the money in 478 00:38:16,250 --> 00:38:21,169 Suze: there for five tax years and you decide that you 479 00:38:21,179 --> 00:38:25,840 Suze: want to withdraw some of the money that you originally converted. 480 00:38:26,530 --> 00:38:32,439 Suze: If you do that, you are going to pay a 10% 481 00:38:32,449 --> 00:38:35,780 Suze: penalty on that money. 482 00:38:36,479 --> 00:38:39,520 Suze: Why are you not gonna pay taxes on it? Because 483 00:38:39,530 --> 00:38:45,330 Suze: you already have, but you will pay a 10% penalty. Now, 484 00:38:45,340 --> 00:38:49,049 Suze: for those of you who did a backdoor Roth IRA, 485 00:38:49,199 --> 00:38:51,678 Suze: I'm sure many of you are confused right now because 486 00:38:51,689 --> 00:38:57,530 Suze: you're like, wait a minute, I funded my traditional IRA 487 00:38:57,540 --> 00:39:00,949 Suze: with after tax money, which is why it's called a 488 00:39:00,959 --> 00:39:05,229 Suze: nondeductible IRA. And then I converted it. 489 00:39:05,870 --> 00:39:07,040 Suze: So, Suze 490 00:39:07,629 --> 00:39:10,830 Suze: does that money still have to stay in there for 491 00:39:10,840 --> 00:39:14,120 Suze: at least five years before I can touch it? 492 00:39:15,050 --> 00:39:18,600 Suze: And the answer to that is yes, it does. 493 00:39:20,159 --> 00:39:24,129 Suze: So that money has to meet the five year rule 494 00:39:24,139 --> 00:39:27,879 Suze: because if you take it out before those five years, 495 00:39:27,889 --> 00:39:34,010 Suze: you will pay a 10% federal tax penalty unless you 496 00:39:34,020 --> 00:39:38,209 Suze: are 59 and a half years of age or older. 497 00:39:40,379 --> 00:39:45,510 Suze: So again, that is how conversions work, whether you are 498 00:39:45,520 --> 00:39:50,509 Suze: converting from a traditional IRA that you never pay taxes on, 499 00:39:50,520 --> 00:39:54,459 Suze: and now you're converting it to a Roth or you 500 00:39:54,469 --> 00:39:58,320 Suze: have a back door Roth IRA where you put money 501 00:39:58,330 --> 00:40:03,260 Suze: into a traditional IRA, it was nondeductible. And now you 502 00:40:03,270 --> 00:40:06,989 Suze: are converting it to a Roth IRA. 503 00:40:08,449 --> 00:40:11,820 Suze: So, do you understand that? Well, let's see. 504 00:40:12,959 --> 00:40:16,530 Suze: You are 25 years of age and you have a 505 00:40:16,540 --> 00:40:21,050 Suze: traditional IRA that you really want to convert to a Roth. 506 00:40:21,929 --> 00:40:25,350 Suze: As you know, if you convert, you're gonna have to 507 00:40:25,360 --> 00:40:31,090 Suze: pay taxes on the amount you convert. So your quiz is, 508 00:40:31,179 --> 00:40:35,649 Suze: how long does the money you converted? Have to sit 509 00:40:35,959 --> 00:40:40,219 Suze: in that converted Roth IRA until you can withdraw the 510 00:40:40,229 --> 00:40:45,959 Suze: amount you originally converted without tax and penalty. 511 00:40:47,389 --> 00:40:51,639 Suze: You're only 25 years of age. Think about it, everybody 512 00:40:55,379 --> 00:40:58,819 Suze: Answer: A) five tax years. 513 00:41:00,010 --> 00:41:00,860 Suze: B) 514 00:41:02,510 --> 00:41:04,000 Suze: you can't do this. 515 00:41:05,750 --> 00:41:06,509 Suze: Which one? 516 00:41:07,540 --> 00:41:09,310 Suze: The answer is A 517 00:41:10,199 --> 00:41:15,209 Suze: and the reason is, like I said, regardless of your age, 518 00:41:16,000 --> 00:41:19,840 Suze: when you convert, as long as it has sat there 519 00:41:19,850 --> 00:41:25,870 Suze: for five tax years, you can withdraw your original converted 520 00:41:25,879 --> 00:41:32,219 Suze: amount without taxes or penalties because you already paid taxes 521 00:41:32,229 --> 00:41:32,659 Suze: on it. 522 00:41:34,810 --> 00:41:36,989 Suze: Next. You are now 60. 523 00:41:37,810 --> 00:41:41,479 Suze: You don't have a Roth IRA. You haven't opened one 524 00:41:41,489 --> 00:41:42,030 Suze: up yet 525 00:41:42,679 --> 00:41:47,199 Suze: and you just converted your traditional IRA to a Roth IRA. 526 00:41:47,989 --> 00:41:53,159 Suze: And now let's say you converted $60,000 and you just 527 00:41:53,169 --> 00:41:57,040 Suze: decide you want to do that for some reason. You know, 528 00:41:57,050 --> 00:41:59,520 Suze: I probably would never tell you to do that. But anyway, 529 00:42:00,110 --> 00:42:07,659 Suze: now two years later that $60,000 has grown to $70,000 530 00:42:08,449 --> 00:42:14,020 Suze: and you want to take out all $70,000 531 00:42:15,600 --> 00:42:20,570 Suze: will you have to take a penalty? A 10% penalty 532 00:42:21,669 --> 00:42:27,080 Suze: on the money? The $70,000 that you just withdrew. 533 00:42:29,260 --> 00:42:32,189 Suze: A) yes. B) no. 534 00:42:34,030 --> 00:42:36,209 Suze: Remember what I told you about penalties. 535 00:42:37,989 --> 00:42:42,979 Suze: The answer is B) no, you do not have to 536 00:42:42,989 --> 00:42:48,320 Suze: pay a penalty because why you are 59 and a half 537 00:42:48,330 --> 00:42:50,679 Suze: years of age or older. 538 00:42:51,729 --> 00:42:56,110 Suze: All right. Will, you have to pay income tax on 539 00:42:56,120 --> 00:42:57,189 Suze: the earnings? 540 00:42:58,310 --> 00:43:01,840 Suze: A) yes. B) no. 541 00:43:05,050 --> 00:43:11,779 Suze: But you have $10,000 of earnings on a Roth converted account, 542 00:43:15,530 --> 00:43:20,260 Suze: right? That you opened two years ago. Think about it. 543 00:43:21,110 --> 00:43:24,320 Suze: Will, you have to pay income tax. 544 00:43:26,330 --> 00:43:31,360 Suze: A) yes. B) no? The answer is yes, because the 545 00:43:31,370 --> 00:43:36,229 Suze: account has not been open for five tax years. So 546 00:43:36,239 --> 00:43:40,959 Suze: the earnings will be taxed as ordinary income. 547 00:43:41,919 --> 00:43:46,350 Suze: So you always have to remember when you convert 548 00:43:47,060 --> 00:43:53,270 Suze: from a traditional to a Roth, a new time clock starts. 549 00:43:53,280 --> 00:43:54,709 Suze: Do you understand? 550 00:43:55,850 --> 00:44:00,899 Suze: So it's really important that you get that converted Roths 551 00:44:00,909 --> 00:44:06,479 Suze: start a new time clock no matter what contributory Roth 552 00:44:06,489 --> 00:44:11,580 Suze: IRAs are aggregated all together. 553 00:44:12,909 --> 00:44:21,029 Suze: Now, let's touch on employer sponsored plans. Roth 401ks, Roth 403bs, TSPS. 554 00:44:22,510 --> 00:44:26,879 Suze: An employer Roth plan also has to meet the five 555 00:44:26,889 --> 00:44:28,219 Suze: year rule. 556 00:44:28,929 --> 00:44:32,600 Suze: So it's important when you have, let's say a Roth 557 00:44:32,610 --> 00:44:33,580 Suze: 401k 558 00:44:34,360 --> 00:44:38,339 Suze: and you have worked for an employer for eight years. 559 00:44:38,429 --> 00:44:42,989 Suze: And now you are leaving that employer to go to 560 00:44:43,000 --> 00:44:44,489 Suze: another employer. 561 00:44:45,290 --> 00:44:50,830 Suze: If you start a Roth 401k with your new employer, 562 00:44:51,239 --> 00:44:57,339 Suze: and you roll your old 401k over to your new 563 00:44:58,020 --> 00:45:04,770 Suze: Roth 401k with your new employer, your time years comes 564 00:45:04,780 --> 00:45:05,409 Suze: with it. 565 00:45:06,040 --> 00:45:11,899 Suze: So your new Roth 401k will be deemed to be 566 00:45:11,909 --> 00:45:16,350 Suze: eight years old. So you have already then met the 567 00:45:16,360 --> 00:45:18,250 Suze: five year rule 568 00:45:19,050 --> 00:45:22,800 Suze: if you have a Roth 401k and you are now 569 00:45:22,810 --> 00:45:27,209 Suze: rolling that over to a Roth IRA that has been 570 00:45:27,219 --> 00:45:27,979 Suze: opened 571 00:45:28,639 --> 00:45:31,590 Suze: for at least five tax years. 572 00:45:32,800 --> 00:45:36,000 Suze: When you roll a 401k, Roth, 573 00:45:36,820 --> 00:45:42,530 Suze: you lose your time period from the 401k. But since 574 00:45:42,540 --> 00:45:46,250 Suze: you had a Roth opened already, 575 00:45:46,899 --> 00:45:51,199 Suze: now your Roth 401k that you roll over already has 576 00:45:51,209 --> 00:45:56,060 Suze: been deemed to meet the five year time clock. If 577 00:45:56,070 --> 00:46:01,428 Suze: you do not have a Roth IRA that you already opened, 578 00:46:02,340 --> 00:46:07,800 Suze: when you roll over a Roth 401k to a Roth IRA, 579 00:46:07,810 --> 00:46:13,979 Suze: that's brand new. The five year clock begins, then that's 580 00:46:13,989 --> 00:46:19,370 Suze: why it's important, especially if you have an employer Roth 581 00:46:19,379 --> 00:46:20,669 Suze: retirement account, 582 00:46:21,270 --> 00:46:25,939 Suze: that you start a Roth IRA, whether it's for a 583 00:46:25,949 --> 00:46:31,379 Suze: dollar $100 it doesn't matter. So you have the five 584 00:46:31,399 --> 00:46:35,439 Suze: year clock started so that if you ever want to 585 00:46:35,449 --> 00:46:42,600 Suze: do a Roth IRA rollover from a Roth 401k, a 586 00:46:42,610 --> 00:46:47,120 Suze: 403b or a TSP, into a Roth IRA. 587 00:46:47,620 --> 00:46:52,370 Suze: Your clock, your five year time clock has already been met. 588 00:46:53,189 --> 00:46:53,928 Suze: So 589 00:46:55,020 --> 00:47:00,879 Suze: you have a Roth 401k with an old employer that 590 00:47:00,889 --> 00:47:05,199 Suze: you opened up five years ago and now you started 591 00:47:05,209 --> 00:47:10,260 Suze: a new job. If you roll over your old 401k 592 00:47:10,340 --> 00:47:16,120 Suze: to your new employer's Roth 401k does the time clock 593 00:47:16,129 --> 00:47:20,659 Suze: on the five year rule start all over again? 594 00:47:22,110 --> 00:47:22,989 Suze: Answer 595 00:47:23,870 --> 00:47:26,839 Suze: A) yes. B) no, 596 00:47:27,939 --> 00:47:33,790 Suze: The answer is B) no, because your Roth 401k with 597 00:47:33,800 --> 00:47:37,399 Suze: your old employer, the time clock goes with it when 598 00:47:37,409 --> 00:47:43,989 Suze: you transfer to a Roth 401k with a new employer. 599 00:47:46,169 --> 00:47:51,340 Suze: All right. Next question. If I roll my Roth 401k 600 00:47:52,129 --> 00:47:56,489 Suze: that I've had for more than five years over to 601 00:47:56,500 --> 00:48:00,399 Suze: a Roth IRA that I will open up at that 602 00:48:00,409 --> 00:48:00,860 Suze: time 603 00:48:01,530 --> 00:48:05,340 Suze: has the five year rule been met? Think about what 604 00:48:05,350 --> 00:48:06,540 Suze: I just told you 605 00:48:07,510 --> 00:48:10,540 Suze: A) is yes, B) is no 606 00:48:12,239 --> 00:48:16,739 Suze: Answer is no because Roth 401ks, 607 00:48:18,399 --> 00:48:22,580 Suze: the time clock does not apply to Roth IRAs. S 608 00:48:22,899 --> 00:48:26,850 Suze: o if you already don't have a Roth IRA that 609 00:48:26,860 --> 00:48:30,870 Suze: met the five year rule or is meeting it, the 610 00:48:30,879 --> 00:48:34,810 Suze: time clock for you starts all over again. That is 611 00:48:34,820 --> 00:48:38,489 Suze: why you need to open up a Roth today. 612 00:48:39,989 --> 00:48:42,839 Suze: Now, I just have to say this before I wrap up, 613 00:48:43,889 --> 00:48:48,889 Suze: you have converted Roths. You can take a 401k Roth 614 00:48:48,899 --> 00:48:51,879 Suze: and put it in to a Roth IRA. You don't 615 00:48:51,889 --> 00:48:57,189 Suze: have to put all these different accounts into separate Roth 616 00:48:57,199 --> 00:49:01,250 Suze: IRAs You don't need a converted Roth. You don't need 617 00:49:01,260 --> 00:49:06,510 Suze: a contributory Roth. All you need is one Roth IRA 618 00:49:06,659 --> 00:49:08,489 Suze: that you can contribute to. 619 00:49:09,030 --> 00:49:13,300 Suze: You can convert two and you can roll over your 620 00:49:13,310 --> 00:49:17,800 Suze: 401k Roth two. So you only need to open up 621 00:49:17,810 --> 00:49:22,750 Suze: one Roth IRA and the sooner you do it, the better. 622 00:49:23,060 --> 00:49:28,319 Suze: I just briefly want to talk about inherited Roth IRAs. 623 00:49:29,219 --> 00:49:33,429 Suze: Now when you have a Roth retirement account and the 624 00:49:33,439 --> 00:49:39,090 Suze: owner dies, obviously, there is no withdrawal penalties for the 625 00:49:39,100 --> 00:49:44,189 Suze: beneficiaries when they take distributions from it on any level. 626 00:49:45,080 --> 00:49:47,350 Suze: But I said penalties, 627 00:49:48,320 --> 00:49:55,929 Suze: because remember, earnings and contributions are always penalty free when 628 00:49:55,939 --> 00:49:59,449 Suze: you die and your beneficiaries withdraw the money 629 00:50:00,129 --> 00:50:04,379 Suze: even if they have not been in there for five years. 630 00:50:05,719 --> 00:50:06,850 Suze: However, 631 00:50:07,500 --> 00:50:11,989 Suze: the question is, will the earnings be tax free? 632 00:50:13,080 --> 00:50:17,310 Suze: The earnings for the earnings to be tax free 633 00:50:18,100 --> 00:50:22,139 Suze: that Roth has got to have been open for five 634 00:50:22,149 --> 00:50:28,100 Suze: tax years before death occurred. So, don't go rushing to 635 00:50:28,110 --> 00:50:33,600 Suze: take out everything at once until you know, if the 636 00:50:33,610 --> 00:50:38,500 Suze: account that you just inherited the Roth account that you inherited, 637 00:50:38,570 --> 00:50:41,350 Suze: how long has it been open for? 638 00:50:41,969 --> 00:50:45,339 Suze: So if it has been open for five tax years, 639 00:50:45,350 --> 00:50:47,939 Suze: you can take any amount you want out 640 00:50:48,629 --> 00:50:52,939 Suze: without taxes or penalties. If it has not been open 641 00:50:52,949 --> 00:50:56,139 Suze: for at least five tax years, 642 00:50:56,939 --> 00:51:01,870 Suze: then what the earnings if you take them out will 643 00:51:01,879 --> 00:51:07,760 Suze: be taxed to you as ordinary income. Again, no penalties 644 00:51:07,770 --> 00:51:12,899 Suze: will ever apply to money that you withdraw. So what 645 00:51:12,909 --> 00:51:16,899 Suze: you might want to do is if that is the case, 646 00:51:17,060 --> 00:51:22,830 Suze: know how much is contributions and only withdraw contributions, 647 00:51:23,139 --> 00:51:26,509 Suze: then when the account has met the five year rule, 648 00:51:26,520 --> 00:51:29,229 Suze: then you take out your earnings. 649 00:51:30,459 --> 00:51:33,638 Suze: What you have to know however is when it comes 650 00:51:33,649 --> 00:51:35,899 Suze: to an inherited Roth IRA, 651 00:51:36,679 --> 00:51:42,040 Suze: the rules are very, very different if you are a spouse, 652 00:51:42,429 --> 00:51:47,239 Suze: a sole beneficiary of that Roth IRA versus a non 653 00:51:47,250 --> 00:51:50,600 Suze: spouse like kids and things like that. So it's really 654 00:51:50,610 --> 00:51:54,330 Suze: important that you consult a tax advisor 655 00:51:54,610 --> 00:52:00,060 Suze: when you inherit a Roth IRA to figure out what 656 00:52:00,070 --> 00:52:03,580 Suze: is the best way to take money. How much can 657 00:52:03,590 --> 00:52:07,129 Suze: you take all of those things? So you stay out 658 00:52:07,159 --> 00:52:11,540 Suze: really of a situation that can get you in trouble. 659 00:52:12,409 --> 00:52:17,399 Suze: All right, everybody. We are almost at an hour. But 660 00:52:17,409 --> 00:52:23,399 Suze: I hope that you found this Suze School really, really beneficial. Again, 661 00:52:23,409 --> 00:52:26,820 Suze: it's a podcast, you can listen to it over and 662 00:52:26,830 --> 00:52:28,959 Suze: over again and 663 00:52:29,600 --> 00:52:34,110 Suze: I think it will help you big time in the future. Remember, 664 00:52:34,120 --> 00:52:37,290 Suze: all I want for you is to be safe, strong 665 00:52:37,300 --> 00:52:38,239 Suze: and secure. 666 00:52:44,489 --> 00:52:45,649 Music: Music Out.