Amy: Tonight, we've got some more important perspective for you on what's happening with the bank industry and of course, its impact on you. You're listening to "Simply Money" presented by Allworth Financial. I'm Amy Wagner, along with Brian James. Man, it's like a week ago, this is not something that we were talking about, Brian, but now it's like another day, another bank falls, or at least another bank making the headlines. Of course, we've got Credit Suisse, kind of joining the fray here. The interesting thing though, I think to point out here is, you know, once we had our Chief Investment Officer, Andy Stout on yesterday, and he said, "This is not systemic. It is not like what we saw in 2007, 2008, where all these banks were taking on loans that were, you know, just defaulting left and right. It's not this kind of house of cards that we had before. It's just kind of bad timing that they all kind of seem to be falling-ish around the same time."

Brian: Yeah. And I agree with Andy, of course, this is not something that we're looking at, at the core of the financial services industry in the United States or even globally. You know, the headlines are scary for sure. There's no doubt about that. But I think as we've kinda unwrapped this Silicon Valley Bank, of course, we've had several days to absorb and learn more. And the big thing came out of that and what I'm starting to feel is where this came from is, this is a bank that was well known in the technology industry. They're primarily financing tech startups. The tech community has a lot of very, very, very smart people who maybe have a little bit of hubris involved too, in terms of, "I'm gonna go with this bank because they're gonna give me the best deal, the best deal I can possibly get, and all my tech bros to connected me to them." And I just think of the other headline I saw the other day was, not that long ago, they were paying 5.5% on savings accounts for people in this industry. So, this kind of, this was...

Amy: Which is obviously non-existent anywhere else, right? So, you can see how they were able to attract so many people in this industry. To your point, Brian, my husband was talking to his best friend on Saturday, and he works for a small tech startup company. It's an app where you can get people to come in and do things in your home that need to be updated and repaired and that kind of thing. It's been around for several years now and they're doing well. But anyway, we were like, "Gosh, we haven't even really heard of this Silicon Valley Bank." And he was talking about the fact that his entire day on Friday, was tied up with the CFO trying to move money and figure out what the heck was going on. And that's really kind of when everything started to hit.

And I thought, "Well, that's interesting because this bank is headquartered in Florida, or this company's headquartered in Florida, yet this bank is in California." And to your point, as we learn more and more about this, of course, tech startup company, right? Kind of fits the mold for this bank. And that's exactly what we're seeing companies like that, that were just starting up were attracted to this particular business. And then think about it, tech had a rough year over the past year, right? And so, as those people needed to start taking money out to pay off debts, to pay off other things, also, there was kind of a double-edged sword to all of this. And the fact that this Silicon Bank Valley held more treasuries than other banks. Well, that might sound like a great thing because treasuries are usually a very safe investment. Problem is with the interest rate hikes, right, that we've been dealing with, now, those treasuries, if you have to sell them, and they do have to sell them because people are asking for their money out, now they're selling them at a loss, and they just cannot remain solvent. They cannot remain afloat in that situation. It just happens to be the way that that particular bank was set up. Not necessarily that other banks are like that, but it was just the set of circumstances that they found themselves in.

Brian: Yeah. It's funny you mentioned your friend in Florida. I had the exact same conversation with a college friend of mine down in Texas. Same deal that their company is very tech-based, they're very healthy, a very successful company. They simply could not access their dollars for a period of three days, and that was gonna cost them at least one paycheck, one payroll period. They have the money, they couldn't get to it. So, and I mentioned hubris, and a lot of this comes from, again, you know, the idea that it's a network. You could not get into this bank to access those 5.5% rates unless you were in this tech community taking loans. Because you, you know, mom and pop couldn't walk in off the street and go open an account in this bank.

You had to kinda already be in the community somehow then they would want you to bring on your personal banking again because you're part of the family. And that, you're right, the technology industry is one that had not had... It just hasn't had any real comeuppance, like other industries have had to suffer over the last 20, or 30 years. Nothing grows to the sky. And I think that's just a big reminder for all of us. If your bank is giving you a fantastic deal and it's just way different than any other bank, then you really gotta look under the hood for what they're actually offering you. What else is in that bank and what could happen to you? Yes, there's the FDIC, so you shouldn't lose too much sleep, but it doesn't mean, you know, it's gonna be a smooth process if you have to go through this.

A lot of these companies, you know, the FDIC covers $250,000. That's nothing for these big companies who have a lot of cash flow. And they might need $10 million in their payroll account so they can pay everybody. Well, that means that all but $250,000 is uninsured. And therefore, that was the big news. They did cover the depositors. The FDIC is covering that. President Biden did make a comment about how the taxpayers will not bear the responsibility for this. And Amy, I'm struggling with that one. I don't see it because, at the end of the day, the taxpayers are the billpayers of last resort. That's where the money comes from. So, I think there's some kind of verbal gymnastics going on there. And I'd like to see more about exactly how he feels that's gonna happen. But regardless, depositors were made to hold this time around, the shareholders are left in the cold. They will suffer, they will lose everything that is different from 2008.

Amy: Yeah. And I think, you know, it remains to be seen, right? Exactly how this is all going to fall out. But because everyone is so concerned, I mean, recent memory says '07, '08, billions and billions of taxpayer dollars bailing out these banks because of the utter collapse of the U.S. economy was at stake there. This is not that. And you feel strongly about that. I feel strongly about that. Our Chief Investment Officer, Andy Stout, feels strongly about that. Thankfully, I think what happened after that is many of these banks learned lessons, right? There were regulations put into place. And while we're not always huge fans of regulation, we would say, "Okay, these were a lot of needed regulations that went into place, that kind of shored these banks up and made them healthier for times like this." The problem is, this time is a little bit different because you've got interest rates being hiked at a pace that we haven't seen in what, 40-something years. And so that's kind of where this new territory lies. And it's kind of gonna be a stress test for these banks, right? How are we gonna handle this?

Brian: In some of this, Amy is Investment 101. So, when we peel back the layers of this, the headline I still cannot get over is that this bank, Silicon Valley Bank decided to buy long-term treasury bonds, when interest rates were sitting on the floor. I learned that in freshman year of college that bond interest rates up, bonds down. And that's exactly what happened. So, it wasn't that the businesses... You know, in 2008, it was at the mortgages where people were going bankrupt. They couldn't afford their mortgages. The banks were left holding the bag. We had to bail that out. This is a little bit different. The bank itself, the businesses they were lending to, for the most part, were really strong. They're fine. It was the assets because when the run began when the rumors started to fly around, and a big part of this, Amy came from the ability to do mobile banking.

So, this is the tech industry, believe me, these folks are not walking into the branches and waiting in the lobby and, you know, and eating mints while they're waiting for their teller to deal with them. They're on their phones or on their computers moving money around. So, this happened at light speed, that this was a technological bank run. It was not your typical... That's why you didn't see pictures of tons of people outside those doors. They were all doing it online. Anyway, the reason for that is because they had the ability to do it. So, they went ahead and pulled their dollars. But once that had begun and it began to snowball, they were forced. They didn't have the dollars in the shoe boxes in the vault like we all think they did. That's not how it worked. They were invested in long-term treasury bonds. Long-term treasury bonds have gotten hammered because interest rates are up, so they had to take losses. That's not a smart decision for a bank to make. And I would venture to say that Fifth Third doesn't think that way, PNC doesn't think that way. That's why Silicon Valley went down the way they did.

Amy: You're listening to "Simply Money" tonight here on 55KRC, as we continue to make sense of these banks that have been collapsing since late last week. We started to hear Silicon Valley Bank, and then you had Signature Bank, Silver Gate. There's a number of them, Credit Suisse making headlines today. Now that the bank is faltering, but I think the bank has had issues for a long time, and big-time investors finally said, "We're out." And I'm sure it kind of spooked from the headlines here in the U.S. about what's happening with these banks. And, you know, another issue that happens during this time, Brian, is it kind of becomes a self-fulfilling prophecy in the fact that you know, are banks collapsing? No. But if people become worried about their particular bank collapsing and everyone does a run on a bank at the same time. And I was just actually reading something about the fact that Bank of America is like flush with cash right now because when you think of a big, big bank, you think of, okay, Bank of America. So, a lot of these smaller regional banks are the ones that people are just getting a little nervous about pulling their money out of those and maybe putting in places that they perceive are safer. And then, of course, the problem is your bank could have been absolutely fine. But if it's a regional bank and every single person that's banking there is saying, "Wait, a second, I'm a little nervous about these headlines, I'm gonna pull my money." All of a sudden that bank that was stable and should be stable becomes unstable.

Brian: Yeah. And I think what's coming out of this, the more I think about it. I think back on my time, I came from the banking industry. I worked for private banks in the past as an advisor. And so you're working with a wealthier set. And those people know they have leverage over banks. So, therefore they wanna compare all the banks together, and they wanna push the banks for the best deal they can get. They want the highest possible rates on deposits, even if they know that forces the bank to take a loss in those positions, they want the lowest possible rates on their loans. So, when you get to a bank, like Credit Suisse, Credit Suisse is not your neighborhood bank where Grandma Eunice has her Christmas Club account, these are major, major, major banks. And you can bet that the richest people on the face of the earth have squeezed them for every last dime.

So, I think what's gonna come out of this is these banks that cater to the huge businesses and the much, much wealthier set, there's gonna be a lot more scrutiny on exactly what sacrifices have you made so that you can establish a relationship with a big business or a very wealthy family, or, you know, with the moneyed set, because those banks have definitely stretched the limits. And that is exactly what happened to Silicon Valley as they were trying to attract the tech industry workers. And I would suspect we're gonna hear some of that because a lot of Credit Suisse those bankers are forced into the same position. They gotta compete somehow. So, they make sacrifices and take risks that are not good ideas.

Amy: You know, at the same time, I think for many people it's like, "Okay, and what does this mean to the Federal Reserve?" Because a lot of this is happening because the Federal Reserve is raising interest rates as a result of that. You've got these banks, of course, that are forced to sell off these treasuries and they're taking a loss on them. Well, now interestingly, markets are seeing a roughly 50% chance that the Federal Reserve is going to just kind of let things stay as they are right now, leave interest rates unchanged. We're about 4.5%, 4.75% after its meeting later this month. Before all this started happening, it was projected that there was going to be a rate hike. And that's...

Brian: Amy, when you're saying before, you mean last Thursday?

Amy: Yes. Literally. Yes. It's funny because I feel like when we talk about these things, and we do because we get into the depth of them or whatever it was less than a week ago that this even came to light. Yeah. And a week ago, seems like a year ago when you think of what we've been through with all these banks since then. But yeah, to your point, less than a week ago, the outlook was very different for the Federal Reserve. Also though, we've got some new economic data coming in which points to the fact that maybe the aggressive stance that the Federal Reserve has taken so far is working.

Brian: Yeah. So, what we're hoping for, right? And this sounds so horrible and backward, we're hoping for a slower economy.

Amy: It's an upside-down world right now. Yes.

Brian: Exactly. We're in Bizzaro World now, but yes, we do want a slower economy because a raging economy, of course, is what drives inflation. I think we've beaten that into people's heads over the last 12 to 18 months as we were trying to fix this. So, we are seeing numbers now on occasion, and they tend to bounce back and forth. The most recent number here is sales at retailers dropped by about 0.4% in February, right? That's not an over-the-cliff plunge, but what it is not is growth. So, people are spending less at retailers. That is one sign of many that indicate that, okay, the economy may just be slowing down a little bit. So, that's a good thing. But now when we have these concerns about the banking industry, then that is definitely something that's gonna cause everyone to take pause.

And there is no doubt that people who are thinking of making a major business investment or something, prior to last Thursday, are now rethinking that whole process. So, there's a good chance that the economy's gonna slow down, therefore, where we were pricing in two more rate hikes by the end of the year. Now, we're looking at best no rate hikes or no changes at all. Even crazier could be some rate cuts. It's not out of the realm of imagination. We could be seeing rate cuts in the short term. That's gonna be some whiplash. And that sounds good on one hand, but on the other hand, this is a little bit uncharted waters to move this quickly.

Amy: Well, speaking of whiplash, I went to the grocery store this week and went to pick up eggs. And I was like, "Wait, a second. These are prices I have not seen in a long time." Wholesale egg prices are down 41%. It was like, "Hello, old friend. I remember when you cost this amount. Haven't seen this in over a year." So, things are starting to come down. It'll be interesting to see how this banking industry situation on top of everything else that the Federal Reserve is trying to take in, how they just kind of digest all of this, and what they do next. We will find out soon, in just a few days. Coming up, are you overspending without even knowing it? What that impact that mobile wallets could be having on you. You're listening to "Simply Money" here on 55KRC, the Talk Station.

You're listening to "Simply Money" presented by Allworth Financial. I'm Amy Wagner, along with Brian James. If you can't listen to our show every night, we've got a way that you can still keep up with us, subscribe, and get our daily podcast. All you've gotta do is search Simply Money on the iHeart app or wherever you get your podcast. Coming up at 6:43, we've got common Roth conversion errors that could actually cost you what you need to know. So, we've got just a few weeks after GE Aerospace announced it's staying here, great news there. Now they're saying, "Hey, not only are we staying, we might actually continue to grow here." Here's a quote from the CEO, "This is our home. We're going to grow the business. I can't imagine we're not growing here." Great news, Brian.

Brian: Yeah, this is absolutely fantastic news locally, but I'll say, when I saw this headline, my first thought was, "Okay, that's awesome." I wasn't thinking about that until you actually mentioned it. So, you know, I don't know how close they got to really making some kind of decision to leave. But that would be huge, right? So, this is the aircraft plan except for those of you who don't actually work there, and there's plenty of you out there, right off 75 in Sharonville, that's what they do. They make aircraft engines and we need a few of those on the face of the earth. So, this is obviously a good place to be. The G'S been in the news a lot lately because they're splitting the different chunks of the company up. And the one we get to keep here is the aerospace company.

So, they're planning to invest $335 million, right? That's million with an M across the whole manufacturing footprint this year. And then $32 million of that is coming right here in little old Cincinnati. 800 jobs coming as well with 300 of those being local. So, this is a big deal because this is Cincinnati's third largest employer. There's 9,000 people in this region across the Evendale campus. There's another 6,000 acres over in Peebles, which is an hour and a half away, I think, something like that. And then there's warehouses down at the airport and as well as some other components up in Dayton. There's a lot of history there that goes back to the Wright brothers. So, we're certainly excited to keep them here and watch them grow.

Amy: Hey, it's crazy. I actually knew about, of course, what was happening in Evendale, but I hadn't ever seen this list of all the places that they are and really all the communities that they impact. So, yes, great news that they're staying here, that they're growing here, and that they're willing to invest in our community long term. We will absolutely take that. All right, we're gonna switch gears now. For those of you, and it's funny because I just noticed this the other day when I was at the grocery store, who use, you know, Apple Pay or any of those kinds of mobile pay apps. There was a woman who was kinda standing in front of me. I would say maybe she was in her 70s. Not to say that I was like, typecasting, but it was like, "Look at her, go paying with her like Apple phone or whatever." And, you know, I'm still like, not necessarily getting out checkbooks, but, you know, not necessarily paying with Apple Pay. But a lot more people are switching to these mobile apps because it's just so very convenient and there's some good and some bad things about that.

Brian: There are, yeah. So, these really, really are convenient. I'll be honest. I've worked in the banking industry for a long time, and when this stuff first came out, even though I walked past the bank branch every day just to go to my office, I was using my phone as soon as I could because just the convenience, it's just so much easier. I'd throw it up there with pay at the pump, which was also a life-changing event. So, it's why do we like it. So, Apple Pay that it's pretty intuitive. You don't have to touch anything. You just hold your phone up and things get paid. But this means that everything is now so integral to our lives that we just have to have them all the time. The fees are not associated with either. I mean, it's not an expensive way to do business, at least as the spender. However, on the other hand, the businesses sometimes pay a little bit more in terms of the merchant fees. And this is kind of where some of the issues are coming up, right?

Amy: Well, it is, but also I think a concerning kind of side effect of this. And I think about my kids, right? I've got a 13-year-old and a 17-year-old and like cash to them. Like they're used to seeing credit cards and debit cards, and now people using their phones. And I think there's something, and this is old school about me, but when you're actually touching cash and you're taking that $20 bill and you're only getting $10 back, it's like, "Well, I really need that." It makes you think twice sometimes. Well, according to studies, people who are using kind of digital wallets, that increases unplanned spending. So, you walk into a store, maybe you're going for two things. You end up buying five things, you're paying for it with Apple Pay, it's increasing what you had not planned on spending by 35%. That's pretty substantial.

Brian: Yeah. It wasn't that long ago on these very airwaves, Amy, that we were talking about Layaway 2.0, which is all these buy now pay later, right? You go to buy something on Amazon and you get something in your face that says, "Hey, you can pay later." Well, now, you know, any financial company, and at the end of the day, these are loans. Any financial company would love to loan you money in any way, shape, or form, no matter how tiny, and charge you some level of interest, which means they're keeping a spread. This is all about spreads with interest rates having gone up, they're gonna make even more money off of these spreads. So, that's why we're talking about this now. So, Apple Pay, of course, allows Apple Pay later, which is simply don't worry about it. We won't pull the money out of your account. We will let you wait on that. We'll just tack on some interest and pull it later. Think of the convenience, Amy, and the favors that they're doing for you.

Amy: Yeah. Well, the problem with all that convenience and those favors is now 40% of Americans say, "Okay, at some point in time, I've used a buy now pay later program." Here's the problem. According to Credit Karma, 72% of those users missed a payment and then saw their credit scores drop. So, they're having huge kind of ramifications on people that maybe they weren't thinking about. Because when you buy several things, buy now, pay later, right? Maybe you could afford one of them, but now you've bought five things. All those payments still do. It's just kind of putting off something that you probably couldn't afford to buy anyway. Here's Allworth advice. If you have to buy now and pay later, well, we believe you probably shouldn't buy it at all. Maybe you gotta rethink that budget a little bit. Coming up next, the Simply Money Scam Tracker is back out. We've got the newest ways that thieves are trying to target you and your money. What you need to know coming up, you're listening to "Simply Money" here on 55KRC, the Talk Station.

You're listening to "Simply Money." I'm Amy Wagner, along with Steve Sprovach. Every day, probably multiple times a day, someone is trying to get to you, your personal information, your money, you name it. And that's why every month, of course, we have our friend, Jocile Ehrlich, on. She's the CEO and president of the Better Business Bureau with warnings that we all need to hear. And this is, I think Jocile, one of the most important segments that we do because this is one that you need to listen to, and then you also need to spread the word to others in order to protect yourself. You said there's a check fraud scam we need to know about.

Jocile: Right. You know, it's making a comeback and it's all starting at the mailbox. You know, we've heard in the news lately about, postal workers being held up for their mailbox keys or the street corner mailbox being broken into. You know, and another trigger is that little mailbox flag on your personal mailbox that you put up so, the mail person knows that you have mail to be picked up. scammers are out there. They're looking for envelopes that might have a check inside, you know, like that bill that you just paid and put in that neat little window envelope that neatly says the business name and address showing through it. That's an obvious sign that there's a check in there, pretty clear. Once they get your check, they can wash that check with common household products. I didn't realize it was that easy, but it is that easy to remove the name of the payee and the amount of the check. From there these guys are gonna fill in a new amount and a new payee and cash the check, or they're gonna sell that washed check may be on the dark web and somebody else is gonna cash it.

Amy: You know, it's crazy that you mentioned this, Jocile because I recently heard about this and thought there's like, "How do you even do that with the ink on it?" But someone right here in the tri-state who wrote a pretty large, generous check to a charity. And they washed that check, and I wanna say it was like a $12,000 or $13,000 check and then made it out to themselves. And so I went online and it's like, there's videos on YouTube where you can actually see how these people do this, and it's insane. You think, "I wrote that out, and there's nothing that they can do once that ink is on there." It's amazing, really kind of what they can do with those checks. And it's horrible.

Jocile: Right. They can go to their kitchen cupboard and probably, every one of us has the products in their home right now that they could use to wash checks. If this happens to you, obviously, you could lose a lot of money. Add to that, that your banking account is no longer secure and you're gonna have to get a new account. The bill that you intended to pay with that check didn't get paid. So, you may have late fees and potentially an impacted credit rating. Now, on the plus side, banks are stepping up their security measures to find these fraudulent checks before they're deposited. But to prevent this from happening to you, consider paying your bills online. Or if you have to mail a check, take it directly to the post office. We've talked about this before, Amy. Don't mail it from your mailbox or the street corner boxes.

Steve: Jocile, I was talking to somebody at one of the local credit unions who's involved in investigating these types of issues with their members, and people are actually putting sticky glue on the end of a broomstick and just reaching in the mailboxes and pulling out envelopes until they find one that they can wash. Oh, gosh. It's ridiculous. You know, but here...

Jocile: It goes to that saying, if you see something, say something. If you see somebody doing that report it. That's insane.

Steve: You know, I've had a number of people come into my office or call me up in the past couple of years, and these aren't dumb people. These are intelligent people that the winner or loser, however, you look at it lost $35,000 through an online scam. And it was extremely sophisticated. I mean, this is something that it would be tough to realize that, this was a scam at face value. And I think social media is helping a lot of these bad actors help take you for your money. What can people look out for, especially with social media platforms like Facebook?

Jocile: Well, speaking of Facebook, there's another scam going around right now to scare Facebook users into sharing their login credentials. You know, you're gonna get an email from Facebook saying that your Facebook page violates Facebook's community standards.

Amy: Oh boy.

Jocile: And it's being disabled. It may also say that if you don't fix this in 24 hours, Facebook is going to delete your account permanently. Now, that's gonna get a lot of people's attention. The email will go on to say that you can request a review or file an appeal using the link provided in the email. And we all know...

Steve: Watch out.

Jocile: ...when somebody sends you a link that you were not expecting, excuse me, very likely something bad is going to happen. In this case, if you click on the link, you're taken to a really official-looking page asking for a lot of personal information. You know, none of this is real. Your Facebook page isn't in jeopardy. All this is only a phishing expedition to see what information they can get from you to steal your identity or worse, don't fall for it.

Steve: You just explained what I got this morning as a text message regarding Amazon. I mean, it was really well done. Click this link so that we can reopen your Amazon account. So, it's not just Facebook, it's all over.

Jocile: It is all over. And you have to just step back a minute. If it's an urgent email all the more reason to step back and think, "Is this real?" You can hover over the email address and make sure that it truly is from Amazon and that they haven't faked it in any way. If it's something that you weren't expecting, go to the original site, call the company directly, whatever, don't respond to the emails. You're gonna get yourself tripped up. As you said, the most intelligent people are often scammed, unintentionally. It just happens because we're all in a hurry and we all have to slow down and think, "Why is this happening to me? Why am I so lucky to win this huge prize?"

Amy: If it sounds too good to be true, it probably is. Yes, exactly. All the things. There's another one I wanna get to, quickly here, Jocile because for anyone who listens to this show regularly, we're not a huge fan of cryptocurrency as an investment. It's not regulated. It's too new, right? There's the FTX and all these other issues that we have seen lately, but you actually said there's a crypto scam that people need to be aware of.

Jocile: Yes. And you know, it's Valentine's. February is Valentine's cryptocurrency scams on dating sites as if dating wasn't hard enough.

Amy: Oh boy.

Jocile: These cryptocurrency scams are targeting people on all the popular dating sites. You start up a conversation, but your alleged match quickly takes the conversation off that platform and onto a texting app like WhatsApp or WeChat. Then they start talking about this exclusive cryptocurrency opportunity where people are making lots of money. That's the name of this game, and they can get you in. Again, lucky you, you're gonna be able to get lots of money in this cryptocurrency situation. And all you have to do is deposit money in this cryptocurrency trading platform. But once you make that deposit, your new love disappears. They've blocked you on all the platforms. They've stopped replying to your messages. More important, let them go. Who cares? More important, and not surprisingly, your money has gone.

Amy: All of these, I think, are great reminders, right? I mean, they're hitting you wherever you are. Social media, I mean, if you're getting social security, your mailbox, whatever it is, they're looking for you. Jocile, I think every month these are just great reminders of how we need to protect ourselves. But talk to your friends and your family members as well. Make sure that they're not falling for these either. That's Jocile Ehrlich with the Cincinnati Better Business Bureau. You're listening to "Simply Money" here on 55KRC, the Talk Station.

You're listening to "Simply Money" presented by Allworth Financial. I'm Amy Wagner, along with Brian James. Do you have a financial question you'd like for us to talk about here on the show? We'd love to, and there's an easy way for you to do it. There's a red button you can click on while you're listening to the show. It's right there on the iHeart app. Simply record your question, and it's coming straight to us. And straight ahead. Do you have any unused gift cards lying around what to do if you haven't used yours and what do you need to know. The Roth conversion. And I feel like Brian, over the past couple of years, every time I go into a financial website, there's articles about Roth conversions, Roth conversions, and why it makes sense right now. But we would say, "Hey, there are also some times when maybe doing a Roth conversion could be a mistake or could cost you." So, let's talk about this.

Brian: Yeah. So, it is tax time, right? So, a lot of people are thinking about taxes. Am I doing the right smart things? Is there something I should be doing differently and so forth? So, there's a lot of ways you can get money into a Roth. And just real quick, here's the difference, right? So, if the traditional IRA, which has existed for a long time. If I put $6,000 into it, I get to deduct that off my income. If I meet certain income rules and so forth, and it will grow tax-deferred. I have never paid tax on those dollars. And then on the back end, I pull it out and pay income taxes on it. The Roth is different. I do not get to deduct my $6,000 on the way in, but it'll grow for 10, 20, or 30 years and I pull it out and I do not pay any taxes on the gains that is the Roth tax-free version. Now, tax-free...

Amy: And I love Roths because I think they give you a lot of flexibility. You know, I think for people who, you know, all your money is in a traditional 401(k) or an IRA and you get to retirement and you're like, "Oh, well, look at this. I've got a million or however much is in there." Well, how much of that do you still owe to Uncle Sam, right? But if it's in a Roth, then required minimum distributions are no longer kind of part of that picture. And you've got a lot more flexibility because if you need $20,000 to take out, you don't have to take $25,000 or whatever out to pay taxes on top of it because you've already paid taxes. You kind of locked in that tax rate years ago whenever you put that money in. So, anyway, just saying, I'm a big fan of the Roth option of just kind of having all those options out there for you.

Brian: Right. I agree. And the tax-free is kind of a misnomer. There's no such thing as tax-free, it's tax now and then it will never be taxed again. So, anyway, so the reason we're talking about this today is how do I get money in there, right? Well, you can always make contributions. They're subject to income limits. And, you know, if you happen to exceed those income limits, you can do a couple of things. You can convert, you can do a Roth conversion, which means I'm gonna take pre-tax dollars. That might be sitting in IRA, or they could be sitting in my 401(k) or 403(b), and then I'm gonna pay taxes on them voluntarily. And then I'm gonna move that into a Roth situation. And it could be a Roth 401(k), it could be a Roth IRA, but the whole point is I'm gonna choose to pay taxes now in exchange for no taxes later and the absence of required minimum distributions.

Now, another thing, and I think this is where the big question comes up, is something called the backdoor Roth IRA contribution. A lot of people have heard of this, but a lot of people don't know how exactly how it works. And there are some things that can kind of get you snake bit if you're not aware of them. So, a backdoor Roth conversion, which means, I make too much money, and that's in the ballpark of $200,000 I believe, for a married couple, and don't quote me, call it $950,000 or something like that for a single. But then what that means is I make too much money to make a contribution, however, I can do a conversion because there are no income limits on converted dollars. So, the backdoor Roth IRA conversion means that I make a nondeductible contribution to a pre-tax IRA, right?

That's some verbal gymnastics there too. But I'm making a contribution that in the past when I was at a lower income level, I could have deducted, but I'm not deducting it. I don't get a benefit upfront, but I can turn around and convert those dollars within a short amount of time and then it becomes a Roth. So, for an extra form, I can get around the idea that I make too much money to make a Roth contribution. I am instead converting. Now, that's all well and good, but you have to pay attention to something called the pro-rata rule. If you have actual pre-tax dollars in an IRA, perhaps it's an old 401(k) you rolled over way back when then you likely will wind up paying income tax dollars on that non-deductible contribution you made when you convert it. That's called the pro-rata rule. And as we get through explaining it here, people are gonna walk away and go, "What?" Google it and read it again and it will sink in eventually. It's a kind of crazy rule, but it can cause you to get double-taxed on those contributed dollars.

Amy1: Well, and I think the key here is, so many of these articles that are written about this kind of say it's a no-brainer. It can be a great tool, it can be a great thing for you to do but there's also times when it doesn't make sense. You know, one of the things you're talking about doing this conversion. Well, you don't wanna pull money out of that IRA to make the conversion to pay the taxes. If you're pulling money out of it to pay the taxes it doesn't make sense. If you've got money elsewhere that's on the sidelines from something else and you can pay the taxes with that, okay, well then that might make sense. Another thing to think about is when you make that conversion, is it going to bump you into a higher tax bracket, right? See, there's a number of things that you have to think through here where maybe it does make sense, but maybe it doesn't.

Brian: Correct. And then there's lots of ways that can sneak up. If you are of Medicare age and you take these distributions for the intent of making a conversion that's gonna run your income taxes up, it's gonna put you in a higher bracket. And that can affect the premiums that you pay from a Medicare standpoint. So, I mean, that's not a deal killer. I mean, Roth conversions are still a very powerful tool if you have a long mindset. But it is very, very much... Make no mistake, you are very much making a sacrifice now in exchange for a benefit later. And for you to truly, the bigger benefit you want later, the bigger the sacrifice you have to make now. It's no different than if I wanna lose weight, I better stop eating so much junk food. Sacrifice now, gain later.

Amy: Yeah, and I think another thing to think about too is when making this conversion, you can't touch that money for five years. So, you know, to say, "I wanna go ahead and convert this because I wanna take it out and not have to pay taxes. I'm just gonna pay taxes on it now, but maybe not deal with the taxes next year." Well, you can't touch that money next year to avoid any kind of taxes or penalties. That money after the conversion has to be there for five years before you take it out. So, just a lot to think through here. Here's the Allworth advice. There are many tax implications when doing Roth conversions. We suggest you seek out a qualified tax advisor who can help you figure out what the best option is for you. Coming up next, the astounding amount of gift cards that are just not being used and how to proceed maybe if you just found yours. You're listening to "Simply Money" here on 55KRC, the Talk Station.

You're listening to "Simply Money" presented by Allworth Financial. I'm Amy Wagner, along with Brian James. I used to have this policy when gift-giving where I would just never give gift cards to them personally, I don't know, maybe I'm getting older, lazier, tired. I'm not sure what it is. But many times now I've got teenagers, they're just like, "Give me money, give me gift cards." It's kind of become something that I've started to give people. The problem is when you give someone a gift card, you don't necessarily know, do they like that store. Do they like that restaurant? Are they actually gonna use them?

Brian: Yeah. And Amy so here's the, I don't know if you know this or not, but if you remember this, but a while back, you and I were working on a project, I don't remember what it was. This was three, four years ago. And to thank me for the help that I had provided, you gave me a Jeff Ruby's gift card, which is extremely generous and very much appreciated. However, I have to tell you, I have to admit that we just spent that the first week of January because it's Jeff Ruby's, it's fantastic. But we had to line up when everybody's gonna be home from college and available. And it's Ruby's so you gotta make a reservation month in advance. You kinda have to predict all this. So, we ended up going on a random school night, and we were out there till about 11:00, or 12:00. It was absolutely delicious, but I had done just what you were talking about, which is keep it in a kitchen cabinet until it came time to use it.

Amy: I was gonna say, that was years ago that I gave you that gift card. So...

Brian: But we loved it and we love you.

Amy: At least you finally used it. But here's the deal. Americans have $21 billion worth of unspent gift cards just tossed in a drawer. I have though learned to make it kind of a policy of mine that once I get one, I try to make a plan to use it within just a couple of months. Stores go out of business, restaurants go out of business. I think you're probably okay with Jeff Ruby's, it's probably gonna be around for a long time, but a lot of these places you just don't know. And also, I think the problem for a lot of people is you get a gift card and you're like, for instance, Starbucks. "I'm not a coffee drinker," but that's a really kind of popular gift card for people to give. So, through the years I've gotten Starbucks gift cards, I'm not gonna go there and drink coffee, I give it to my kids. But there actually are options out there. There's a couple of places that you can go. Raise is one of them, CardCash, Gift Card Granny. If you're not gonna use that gift card, you can actually sell it on that site. Now, you're not gonna get dollar for dollar, but you will get close and at least you'll get money back towards something that you really would buy or really would use.

Brian: Yeah, and it's just, you know, anymore there's a lot of companies out there just making money in creative ways, and simply, they make money by taking a percentage off of the value of that card. Now, you don't have the ability to do that. But what they do is they've made arrangements with all these stores and vendors and things, that they can cash those out and make them, and kind of keep some of the spread a little bit. Now, you can kind of do that in a roundabout way. You could sell somebody your $100 gift card that you paid nothing for, sell it to them for 80 bucks. You get $80 for nothing. And they get a $100 gift card for the cost of 80 bucks. But that's effectively what these companies are doing. So, but you know, it's an option out there. If you've got 'em stacked up in a drawer, take a look. Maybe you can get some money out of it.

Amy: I was with my son the other day, cleaning out the drawer, like next to his bed, and I was like, "Oh, my goodness, buddy. Like, here's this, you know, Nike gift card that you have and a Dig's gift card and a McDonald's gift card." And though he doesn't have any idea how much the balances are on these. So, I think kids too, like kind of understanding how these work and the best way to use them and use them as quickly as you can makes a lot of sense. Also, something I think that a lot of people aren't thinking about is, say you got a $100 Kroger gift card a year and a half ago. You were able to buy so much more with that $100 than you are now. So, inflation is actually eating up your purchasing power with these gift cards. Just to think through. If you've got them in a drawer, get them out. Look at them, and come out with a plan to spend them. Thanks for listening tonight. We hope we're gonna tune in tomorrow. We're answering common questions about working with an advisor. You've been listening to "Simply Money" presented by Allworth Financial here on 55KRC, the Talk Station.