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The Clark Howard Podcast
04.28.25 Prime Time For Roth Conversion / The Return of Big Bank Fees
00:33:39
Prime Time For Roth Conversion / The Return of Big Bank Fees
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- [00:00]
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- [00:34]
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- [01:07]
Clark Howard
It's great to have you here with us on the Clark Howard Show. You know, our mission is to serve you with advice and information that empowers you so you make better financial decisions in your life. And you know I've been accused, actually self proclaimed, I'm the man from Roth. But all kidding aside, I want to talk about why right now is a really good time for you to consider doing what's known as a Roth conversion. I'm going to tell you what that means. And also you got to know something. There are some new fat fees maybe on the way to your bank or credit union account or bank or credit union credit card. It will be really a situation bank by bank, credit union by credit union. I'm going to make sure you know what's coming just so you're prepared. So a lot of people have money and traditional IRAs and you've heard me talk over and over again, Roth, Roth, Roth, Roth, Roth. So why am I obsessed with the Roth? Because when you do a Roth 401K, a Roth IRA, you're done with tax because you put in after tax dollars that grow tax free all through the years and then you spend the money tax free and you don't end up in this crazy punitive tax formula with Medicare when you turn 65 where you're charged extra premiums because of the money you might be getting from traditional 401ks or IRAs where the government then not only taxes you on the money you pulled out of the IRA or 401k. But then they charge you higher premiums for Medicare because it now reflects like you have higher income. It's a double whammy that you get hit with. So a conversion to a Roth is something that you don't do willy nilly. But you really think about when we go into a cycle, which we may have this year, where stock values go down a whole lot, then it's a lot cheaper to do a conversion from a traditional IRA to a Roth ira because the money you move across, you have to pay tax on everything you move across. But if the values of your investments have come down is how you turn a bad thing into a good thing. Lemons into lemonade. Because you can do that conversion, pay the tax now, when markets recover, you're then having that money grow till you retire. Tax free, spending tax free. And no Medicare penalty either. It's really good stuff. I love the Roth because you don't have to worry about what tax rates are going to be in the future. And by the way, if you're young and you're saving money for retirement and your employer has a 401k plan, odds are about 80% that they have a choice where you go traditional or Roth. You have to elect Roth 401K. When you're young, there is no doubt, unless you're an athlete earning $12 million a season, you want to be in the Roth version of the 401k. If you're in the half of employees who aren't offered a retirement plan at work, that means it's up to you to save money in an ira that should be a Roth ira. Roth, Roth, Roth. Because the upfront tax benefit you get with pre tax dollars going into a traditional 401k or IRA, the tax benefit is not worth it. But much later in life, the benefit of all that money growing tax free and being able to be spent tax free is worth it. One has a tax time bomb doing traditional. The other is a tax deal that not having to worry about any taxes you have to pay down the road. So again, if you're an NBA player, an NFL player, or a college athlete earning tremendous nil money, then you want to do traditional. But if you're not earning crazy amounts of money, which is a lot of money, we're talking about 400, 500, $600,000 a year, you want to be in Roth stuff, not traditional.
- [06:00]
Co-host
Speaking of retirement, I thought maybe we could announce our new Clark approved retirement calculator. We have@clark.com.
- [06:07]
Clark Howard
Oh, man, I am so excited about this. I didn't know we were.
- [06:11]
Co-host
It's launched.
- [06:12]
Clark Howard
Launched officially. We've been playing with the beta, steadily improving it for, I guess, six weeks. I am really excited about this because we have developed a dynamic retirement calculator where whatever age you are, whether you're really young or you're pre retirement or whatever, you can see the variables. You put in this, you put in that, and you're able to see, okay, I'm on track, I'm not on track. And it's a very easy to use and at the same time, an incredibly sophisticated result that's available with the retirement calculator tool. And I'm thrilled that our team, led by James, developed this, refined it, improved accounts for inflation. It accounts for what you might receive from Social Security. In short, it's great.
- [07:10]
Co-host
All right, we'll go to some questions. Lori in Georgia wrote this one. Clark, you often talk of traditional as well as Roth iras. However, I've contributed to a non deductible IRA for several years in the past because my husband didn't qualify. But I, as a non working spouse, did. As we are three years away from my husband retiring. How should we handle these? We have a lot of money in traditional IRAs that we realize will hurt us greatly when we have to take RMDs down the road. Currently, my husband makes over $350,000 a year, so converting to Roths has not been on our radar. We pay top premiums for our Medicare coverage. Tax wise. Will these non deductible IRAs hurt us when withdrawing? Will we have to take RMDs on them? Thank you.
- [07:58]
Clark Howard
All right, so Laurie, thank you very much for this question. With the income that you have as a couple, if you don't do so now, you need to do so very soon. You need to go sit down with the CPA who does tax and talk this through. Because what the proper course is with the non deductible IRA is using it as what's known as a backdoor Roth. There's a stupid provision in the law that allows people that are income ineligible for a Roth IRA to contribute to this oddball thing called a non deductible ira, regardless of income limit. Then you immediately convert it, which there's no prohibition in the law, into a Roth. The reason it would have been better if you were doing that all along is then all the growth in that IRA would have been tax free. Now you have a much more complicated situation that you're going to need first your statements of when you contributed. I hope you have those all through the years and you're going to need you know the current value of Those non deductible IRAs because the accountant will have to go through a bunch of machinations to figure out what tax is owed on the earnings from the non deductible Iraq. The original contributions are not subject to tax where normally in a traditional IRA the contributions are also subject to tax to make your eyes water in your head spin. Non deductible IRA is a very complicated thing and that's why figuring this out tax wise and when you should do any kind of conversions and anything like that need the help of a tax professional and it needs to be could be an enrolled agent which is a different kind of tax expert or a CPA who does tax based on your husband's earnings. I think it's most appropriate that it be a CPA who does tax.
- [10:18]
Co-host
Logan in Oklahoma says I have about $35,000 in CDs at my credit union. Two 12 month ones at $10,000 and two 6 month ones, one with 5,000 the other with 10. My question is with stock prices falling, should I cash out early on one of my CDs and invest in the market or use some money in my savings which has around $50,000. I'm in my mid-20s, single and wanting to build a solid future, faith, family and finances and see this as a time to diversify some more. I don't always get to listen, but I tune in when I can and I appreciate people like you and the work you do to encourage and motivate us with sound financial tips. Well in his 20s.
- [10:59]
Clark Howard
20S I love this. You already have all this money saved so no, I don't want you to terminate any of your CDs to put money into investing. We don't know. There's too much financial uncertainty right now to know when the bottom is for the market. That's why people are not doing what they historically do during a market decline is by the dips because nobody knows. There's no clear vision in the short term at all what's going to happen with the market long term. I can't think of any exception in history. Markets always recover. So I would rather see you instead of doing something like suddenly pulling money out of a CD and paying a 90 day penalty, I would much rather see you get in the habit of contributing every single month to your own Roth ira. Man from Roth, that you do that consistently. You're allowed to put up to 7,000 a year into it if you take some of the money out of savings. So you can fund the Roth IRA in equal chunks month after month. We don't have that many months of the year left. We've got. So let's say over the next seven months you put in a thousand dollars a month to get your 7,000 in again, $ cost averaging. And because you're in your twenties, I'd like you to look at a fund that would be a 2065 target date fund. Target Date Fund is a widely diversified single holding the all the money you put in your Roth goes in there. Where would I like you to do the Roth first choice among my favorite children? Open A Vanguard Roth IRA and put it in the Target Retirement Fund, 2065 or 2070 based on your age. And I'm so proud of you with how much money you've saved. Just live your entire adult life contributing on steady as you go into that Roth ira.
- [13:08]
Co-host
Okay. Edward in California says since the cost of insurance has been going up so much, especially, especially in California, where are the best places for me to find home and auto insurance coverage? I'm a Navy veteran with a USAA credit card and a member of Navy Federal Credit Union. I have been with my insurer for over 35 years.
- [13:29]
Clark Howard
Okay, first of all, thank you so much for your service to our great nation. My brother, one of my oldest brother, was a naval officer in Vietnam and served after the war in the Naval Reserves. And I'm just so thankful to people who have served. My other brother was in the Air Force Reserves and would be very upset if I didn't mention that. So as far as the answer to your question, your insurer that you're with right now has probably been putting a world of hurt on you. They've been having trouble losing money. They've been losing a lot of money in recent years. And so they've been very aggressive about raising premiums, you said, especially in California. But this has been a problem for them all over the country. And to shop around, you could start your you're with usaa. Have you not gotten quotes from usaa, one of the nation's largest insurers? And there is no online shopping service I can send you to that's legit. To compare rates for auto and homeowners insurance from different companies. You have to actually go to the individual websites of insurers and get quotes from them. In California, there are a number of insurers. California is such a large market that have been around a long, long time that are not big known national brand names. I bet if you go to the California Department of Insurance website you can see the names of insurers licensed in California to write auto and homeowners insurance and get quotes from them depending on where. Edward on where you are in California. If you're in a high wildfire zone risk insurers aren't that interested in writing homeowners insurance. That's not an issue with auto. If you're not in a wildfire danger zone, then insurers are happy to quote you and compete for your business. So the more you shop, the better it'll be. Coming up ahead. I talked about this at the top of the podcast. There are bank fees that are about to get bad ugly again and I want to tell you the backstory and tell you what to watch out for and things you got to be aware of to prevent being subject to these fees.
- [16:10]
Don McDonald
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- [17:11]
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- [18:14]
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- [18:48]
Clark Howard
There'S some stuff you need to know about the banks that Based on court rulings and administrative decisions in Washington, things that were going to be a benefit to banking customers are gone now. There were two really high junk fees that were subject to very tight caps that now are fully deregulated. One is if you ever bounce a check or in the more common circumstance today you have a debit card with a bank and you use it for purchases you make around town and wherever you go, banks do something really crooked terrible with the debit cards. They approve a transaction when you could even be a dollar short for that transaction. They approve it so that they can then charge you ugly ugly junk fees that were subject to a cap now no longer are. And we're going back to the bad old days where there will be banks that charge. And sadly some credit unions do this ugliness too, where they trick you approving a transaction and then may charge you 30 $35 fee for everyone they approve even though they knew you didn't have the money. It's a massive profit center for the banks and credit unions. So what you need to know is that just because you get an approval code on a debit card transaction or writing a check somewhere, you're not getting an approval code. But people write a check thinking they're okay because what you don't know can hurt you here. Before you do a transaction, you need to look at your app for your bank or credit union and make sure you're good for the money. But the bigger thing with debit cards, do not let a credit union or bank trick you. I Can't believe I'm having to throw credit unions into this. But there are credit unions that unfortunately, they may have gotten their management from banks that play just as dirty ugly as the banks. They trick you into approving them, ripping you off by approving transactions when they know you don't have the money. You have to give a bank or credit union permission to cheat you and they word it in a way that they treat it like. And the wording like they're giving you a benefit when they're actually trashing your wallet. So you don't want them to approve a transaction when you don't have the money because they're just using it as a trap to cheat you. And it's legal again for them to cheat you. Another thing, if you're a longtime listener viewer, you know, I changed my position two years ago on credit card payments and because of the hurt that can happen to your credit report and your credit score. And now again, because credit card late fees are no longer capped and they can be back to the ugly, ugly late fees that banks and credit unions were charging. Mostly banks in this case. I want you to set up where your credit cards are automatically paid. You just sign into your account or go on the app for your credit card and you set up where they automatically, on date, do either pay. If you're somebody who pays your bill in full, it's automatically paid. Or if you're not somebody who's able to do that, that the minimum payment is always made automatically. This is so important because now we're back to a twofer. One, you could forget to make a payment or the bill doesn't show up or whatever it is, or you get your bills by email and you overlook it and you don't pay the bill on time, you get hit with the monster late fee and you can end up with a 30 day late on your credit report, which will devastate your score. So the whole thing here is prevention is the best cure. And it's not your job to make the stockholders of the bank filthy rich because let's go back to the overdraft thing. The cost to a bank apparently is pennies to deal with the overdraft thing. And they're charging these massive fees that they're. Well, they were. And now they'll be able to again, why a credit union would engage in this despicable practice too, I got no idea. But there are credit unions that do too. Just got to tell you, not all credit unions are wonderful. Even though I love credit unions, and then with the credit cards, they have a right to their payment on time. So if you know in your scattered life you're going to forget things, set it up where it's automatic pilot so you don't put yourself at risk to the junk fees or to trashing your credit.
- [24:30]
Co-host
All right, we'll go to some questions. Logan in Wisconsin says I'm a relatively new listener, but I'm already a huge advocate of your advice. I've learned about personal finance through digital mentors over the years, and you've quickly become my favorite. I grew up without any financial education or guidance, and now with my first child, a baby girl due in June. Congratulations.
- [24:51]
Clark Howard
Congratulations.
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Co-host
I want to change that trajectory for her. My goal is to have investment accounts set up within her first week of life to give her the best possible financial foundation. I'd like to avoid education specific accounts and instead focus on broader, flexible investment options that will serve her well into adulthood. What are some practical steps I can take to start her on the right path from day one? Thanks for all you do. And P.S. i don't think you stink, but I.
- [25:22]
Clark Howard
Do steak all the time. You know, when you buy that cheap deodorant and use it, what happens?
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Co-host
Not true. I stand next to you.
- [25:32]
Clark Howard
So congratulations on your child coming. So I'm going to surprise you. You specifically said you didn't want an education oriented account, and now I'm going to say, but you actually do want an education oriented account for your child because of a change that Congress made in the law three years ago. I forgot exactly when, but it, it's totally been a game changer. So you're now allowed to grow money in a tax free 529 education account for a child who then decides not to go to college or scholarships out or whatever it is. And then you got that money sitting there and you're able to then transfer that money tax free when your baby becomes a young adult, where it's grown tax free from birth all the way to adulthood, you're then able to take up to $35,000 and move it tax free into a Roth IRA. So it sets up a child at birth to have an enormous financial advantage through adulthood all the way into retirement. It's phenomenal. And it is the best tool available for saving money for a child. I mean, because I used to say, okay, what's the culture in your family? Do people go to college? And if somebody said, nah, yeah, maybe I couldn't recommend a 529 account. Now the 529 account is the best answer for family cultures where college is not important and family cultures where it is to achieve the goal you want, which is the best possible, most efficient place to put money aside for your child.
- [27:37]
Co-host
Vern in South Dakota says I'm lucky that my employer shares profits via an annual payout given early in the next calendar year, as in a separate paycheck. I'm unlucky that The IRS keeps 22% every year as if I won the lottery, although I get back last year's bonus every April. They just take another 22% for the current year. In effect a perpetual free loan to Uncle Sam until I'm fired, quit or die. People say to just adjust withholding but the irs changed the W4 so you can no longer simply name the number of exemptions, you have to name the number of dependents. So increasing mine would be lying to the irs? A big no. No. Are there any solutions or just Congress need to act?
- [28:19]
Clark Howard
So Verne, here's what's interesting and what you said. Normally the it's just a flat thing that happens with bonuses that are taxed at a flat rate and that you're getting that money back later. Meaning that your tax rate is so low that the 22% they're taxing the bonus is way in excess of what your tax rate is. That's an unusual situation and so this is a tough one because you're right, you are making an interest free loan to the irs and I don't know if you've talked to HR at your company to see what ways you can reduce withholding on the W4 that works in their payroll system. But I don't like making interest free loans to the irs. And I understand your frustration, but it's also great that your tax rate is effectively low enough even including this bonus that you're now getting back a lot of that 22% withheld.
- [29:35]
Co-host
Okay and Kelly in California says my question is about co signing a loan for for my 82 year old mother to purchase a fifth wheel to live in. But the situation is different from the norm. She is older and no longer has credit due to not owning a home or having any credit cards. But she does have investments. The loan is not large enough for her to obtain a securities backed loan, but it's large enough that she doesn't want to buy the vehicle outright and lose the earning power of her money. If we co sign she would be eligible for the loan that she would already be eligible for had her credit not gone dark. Do you see any issues.
- [30:10]
Clark Howard
So the only issue is that she needs to put in her will that you inherit the fifth wheel so that you're still responsible for the loan while it's there. As a cosigner, you should at least know that you have it secured by the value of the fifth wheel securities. So you could do a margin loan, but those carry too high a rate and so I wouldn't recommend that. I assume that the loan that you're co signing is at a lower interest rate than a margin loan. I just want you protected as a cosigner. So yeah, in terms of issues, I think that's all you got to worry about right here. And I hope that you've heard something today that's been really helpful to you. And speaking of helpful, know that all week long our team at the Team Clark Consumer Action center is available to provide free one on one advice to you as we've been doing now for almost 33 years, providing free one on one advice. If there's a question, you have a problem, there's something you just don't know how to navigate with your wallet. You can see how to get that free one on one advice if you go to clark.com cac and I hope you have a great rest of your day and that you are empowered by this podcast because what we're all about is you being empowered with knowledge so you can save more, spend less, and avoid getting ripped off. And I'll see you on Wednesday.