Smart Money Podcast: Job Scams, and Maxing Out a Roth IRA

Liz Weston: Welcome to the NerdWallet Smart Money podcast, where we answer your personal finance questions and help you feel a little smarter about what you do with your money. I'm Liz Weston.

Sean Pyles: And I'm Sean Pyles. To contact the Nerds, call or text us on the Nerd hotline at 901-730-6373. That's 901-730-NERD, or email us at [email protected].

Liz: You can get new episodes delivered to your devices every Monday if you hit that subscribe button. And if you like what you hear, please leave us a review. Those really help.

Sean: Yes, they do. This episode, Liz and I answer a listener's question about maxing out a Roth IRA. First, though, in our This Week in Your Money segment, we're talking yet again with personal finance Nerd Bev O'Shea about her latest article about scams people are falling for right now. This time we're focused on job scams.

Liz: Hey, Bev, welcome back to the podcast.

Bev O'Shea: Thanks, Liz. It's good to be back.

Sean: Great to have you on as always, Bev. Can you give us a rundown of what job scams are and how they work?

Bev: Sure. Job scams are usually when you either think that you've got a job, got a job interview, or that you can get some insider information on jobs by sending money. Job scammers may be after your money, but they may also be after your personally identifying information.

Sean: How are job scams working in today's world? I understand that they've been around for a while, but it seems like scammers are using new technology to lure people in. Is that right?

Bev: That is right. Because of the pandemic, a lot of us are experienced at working at home, and a lot of people are interested in continuing to work remotely. And now remote interviews don't surprise us or raise our suspicions that anything is amiss.

Sean: Right. Whereas in the past, if you had a potential job lead and you're talking with someone who's on a Zoom call from their basement, that would have seemed kind of sketchy, but not so much anymore.

Bev: That's true. Yeah.

Liz: And you wrote about one woman who thought she had a job and then was going to be sent some reimbursement for some equipment. Could you talk about that a little bit?

Bev: She had applied for several PR jobs, mostly in social media. She was delighted when she heard back from McKesson, which is a large pharmaceuticals and other medical supplies company. She filled out a questionnaire online and then had an online interview — was told that she was hired, she was their choice and they would be providing her with some equipment.

But instead of sending it, the company said that they were sending her a check for $5,000 and that then she would be given a code to use to order it from a Venmo store. She said it seemed a little bit odd, but it was McKesson — it was a big, established company that she trusted. And so she just went along. And she said the check came, the $5,000. She didn't order right away, though. And then the check bounced. And she was told, oh, something had gone wrong, they were sorry, but if she would just go ahead and put this on a credit card that they would reimburse her. She said she still was thinking, "But it's McKesson. I know it seems weird, but it's McKesson." And of course, it was not McKesson.

Liz: How did she find out it was a scam?

Bev: The code that she used on Venmo. Venmo defaults to public transactions — somebody else who had been scammed was looking for that and let her know.

Liz: Oh, wow, that's amazing. And that's one of the tipoffs, right? If somebody wants you to go through Venmo or some other person-to-person outlet for sending money, that can be a red flag, right?

Bev: Yes. Sending money itself can be a red flag, Liz. Usually when you're interviewing for a job, you don't have to pay for anything.

Sean: And part of why these scams can be easy to fall for, even if you think you are savvy and know how to navigate job listings, is that these criminals can create domains that look a lot like the official company website, correct?

Bev: Yes, they are cloning websites. So what they can do is go to an industry, say, job board, and post it there, and then also have it posted on their twinned website. Now, you can check this by going to the website yourself, by searching online for the company and getting the company that way. You may find if it's a scam that there will only be the ad on the job board and on the cloned page that they have created.

Liz: So you're saying go directly to the actual site; don't use the links that are in the email or the other communication, which may be from the scammers?

Bev: Right.

Sean: In this case, the consumer lost some money. But in many instances, losing personal information can be a lot more damaging. Can you explain why that is?

Bev: Because of identity theft, people can apply for credit in your name. They can use your information to pose as you for other reasons. They can, and did last year — they stole an awful lot of unemployment benefits because that is the information that the government uses to verify your identity.

Liz: So people lost unemployment benefits. I think some people lost their stimulus checks as well, right?

Bev: They did. Yes.

Liz: Ouch!

Bev: And when they needed it the worst. According to the FTC, identity theft complaints went up 113% over 2019.

Liz: Holy cow!

Bev: Yeah.

Sean: Wow.

Liz: Then we've also got to worry about tax refund fraud as well, because if they have all that information on you, they can file a tax return and get your refund, right?

Bev: Yeah, that is correct. And as cybersecurity expert Adam Levin pointed out, even seemingly innocuous information — like your name, address, your phone number, the names of your references — that they still have a few more what he called "tiles in the mosaic of your life." And the more information they have, the better it is for them.

Sean: The more tiles they have, the more of a complete picture they can create of your life.

Liz: And if people don't know, there was also a huge breach at LinkedIn, which means that if you were on that site, in all likelihood, a lot of the details of your work life were exposed. So keep that in mind. If somebody has information about you, they only need a few more pieces to really be effective in pulling off identity theft.

Bev: It makes it all the more important to hold onto every piece because somebody may already have many pieces of the puzzle.

Sean: Bev, what is your best advice for people to avoid job scams?

Bev: The best thing to do is check it out as best you possibly can. Use LinkedIn to help you. LinkedIn has been a vector of some problems, but it's also a solution. If you have, say, a friend of a friend or a connection of a connection that actually works at that company, that's a good way to see if the job and the person really exist. Another thing is to go to the company's HR page and look and see if the role that you're being told that you're applying for is actually being advertised.

Liz: Well, Bev, what should you do if you get a job offer?

Bev: First, make sure that the offer is legitimate. One thing that you can do is put in the name of the company with the word "scam" when you're searching, because people who have been ripped off tend to be very loud online.

Liz: I'll bet that's true.

Bev: Do check, though. Just don't just look at the numbers, because if you look up "McKesson scam," you'll get a lot of hits, but that doesn't mean that McKesson is a scam company. Find out the backstories. But try hard to find somebody who works there, and reviews of the company. And don't give them money or information until you are 98% confident that this is on the up and up. And be especially careful if somebody is offering you a whole lot of money for a job that does not require a lot of skill, or if you get an offer too quickly. If you're in an industry where there're typically three or four interviews before you get an offer, and you get one right away, you should be more suspicious than overjoyed.

Sean: If it's too good to be true, it probably is.

Liz: One thing people could do is simply pick up the phone and call the company's HR department — obviously doing your own research, going through whatever the potential scammer is offering you — but if you go and simply ask the HR department, "Am I talking to the right person? Did I actually get this job?" It seems to me the HR person would know.

Bev: Yeah, they should know: And do I actually have an offer? And if you don't, nothing is lost. The company will be grateful to you because they will want to know what's going on and how their name is being used.

Liz: Oh, good point. Yeah.

Sean: All right. Well, Bev, thank you so much for talking with us.

Bev: Anytime.

Sean: Now let's get on to this episode's money question.

Liz: All right. Sounds good.

Sean: This episode's money question comes from Stephen who sent us an email asking, "I have a question about maxing out my Roth IRA. My wife just finished school and has started working, so now we have an influx of money and we will be able to max out our IRA this year. Does it make sense to invest a little bit each month until it is maxed out or invest it all at once?"

Liz: To help us answer Stephen's question on this episode of the podcast, we're talking with investing Nerd Alana Benson.

Sean: Hey, Alana, welcome back to the podcast.

Alana Benson: Hi guys, thanks for having me.

Sean: I want to start by explaining some terms, because I think that retirement investment vehicles can be a kind of confusing jumble of letters and numbers. So can you please explain exactly what a Roth IRA is versus a traditional IRA?

Alana: Before I even get started with that, one thing I've noticed is that there is some confusion about what exactly a Roth or a traditional IRA is. So these things are not actually investments. They're where you keep your investments. So just like a savings or a checking account at your bank, you can open an account, but that doesn't actually mean that you have any money in there. You have to put money in there first. So you can open a Roth IRA or a traditional IRA, but you then have to buy your investments like stocks or mutual funds from that account. So it's really just where your investments live.

Liz: It's like the bucket that you're putting your investments in, essentially?

Alana: Exactly. So when you have either of those accounts, you're not actually invested in anything yet. So Roth IRAs and traditional IRAs are retirement investment accounts. They are very, very similar, but they do have some differences that can be pretty important for investors to know about. And the biggest one is a tax difference.

Liz: Traditional IRAs give you the tax break upfront when you make the contribution, but then when you withdraw the money in retirement, that income is taxable. Roth IRAs are the opposite. They don't give you a tax break upfront, but the money comes out tax-free in retirement. A Roth IRA can make a lot of sense if you think you're going to be in the same or a higher tax bracket in retirement.

Alana: If you need to have access to a tax deduction, a traditional IRA might be a good choice for you. But the Roth IRA is great because you contribute to it year after year after year. When you take it out, you don't actually owe anything to the government.

Sean: And there's Roth 401(k)s. And in both instances with Roth IRAs and Roth 401(k)s, they basically just mean that you're contributing after-tax income. And then you can withdraw the retirement funds tax-free.

Liz: Now, I noticed people also get confused about traditional IRAs and their ability to contribute to those. They think if they have a workplace plan like a 401(k), they aren't allowed to contribute to a traditional IRA. And that's not true, right, Alana?

Alana: Yes, that's correct. If you have an employer-sponsored 401(k) plan, you can also have an IRA. You can even have multiple IRAs. The one thing is that you can only contribute a certain amount per year into IRAs. So even if you have two IRAs, you can only contribute $6,000 max, or $7,000 if you're 50 years or older. If you had two, you could put $3,000 in each, but your total contributions can't be more than $6,000.

Liz: So you can't put $6,000 in a Roth and $6,000 in an IRA?

Alana: Correct.

Liz: The other issue is that if you do have a workplace plan, your ability to deduct your IRA contribution might be phased out at certain income levels, which I can never keep in my head, but they're on our site.

Alana: Yeah, exactly.

Liz: OK. One quick reminder courtesy of our legal department before my next question, and that is: We are not investment advisors and will not tell you what to do with your money. Rather, we provide information so you can make your own decisions.

OK. With that out of the way, at a high level, if somebody has a lump sum of cash that they want to put toward retirement savings, is there a reason to wait to drop this chunk of change into their IRA, or does it actually make more sense to make regular contributions?

Alana: So it really depends on the person. If that lump sum of $6,000 is no financial burden to you whatsoever, then yeah, you can contribute it Jan. 1 of the year. And then it has the whole next 12 months of the year to grow. Contributing $6,000 all at once is pretty hard for a lot of people. When you're investing in an IRA, you're investing for the long haul. You're investing for retirement. You're looking over this whole lifespan for your investments to grow. And to cause yourself a financial hardship just to get that extra few months of growth probably isn't worth it.

Sean: That's what stood out to me when reading this question is that someone in this situation, they might just want to double-check that they have their other basis covered — like squaring away an emergency fund, maybe saving for their kid's college — before dropping an entire amount of a windfall into a retirement account.

Liz: There's something people should keep in mind, though, is that when you use a Roth IRA, your contributions can come out at any time. That's tax-free, there's no waiting period, you don't have to do any kind of complicated math to figure out how much is taxable. You're always allowed to take out your contributions. And because that's true, you can use it as a backup emergency fund. So even if you put your money in and you realize before the end of the year or even afterwards, "Oh, I need some of that money back," you can take that back. The only time you get into trouble with taxes and penalties is if you start taking out the earnings.

Sean: It seems like in a world where high-yield savings accounts are not very high yield right now, this might be a good alternative for people to look into.

Alana: I think that's a really great point, Liz, and one that we should really hammer home. So contributions are what you're putting into the account. So say I put $100 into my Roth IRA; that's a contribution. But then if I took that $100 and I invested it in a stock and that stock made, let's say $10 — math is hard, we're going to work with round numbers — if that stock made $10, then that $10 is the earnings versus the $100 is your contribution. And you can take out that $100 contribution at any time, but you can't take out that $10 earnings at any time.

Liz: I'm a huge fan of Roth IRAs because they do give you that pot of tax-free money in retirement. And retirement may seem billions of miles away, but it is going to come at some point. And it's really nice to be able to manage your tax bill, to have that tax-free pot of money, because money that comes out of other retirement accounts like 401(k)s and traditional IRAs and rollover IRAs, that's typically taxable. And if you're a good saver, you could find yourself facing a pretty substantial tax bill in retirement.

Sean: Yeah, it's nice to tuck away different pots of money in different locations so that you have things that are more tax-advantaged for different purposes.

Liz: I've talked to enough CPAs who are like ... They tend to be really excited about tax deductions, but I've talked to a couple of them who overdid it and they got to retirement and realized, "Everything I've got is taxable." I like the fact that I've got my money spread out in different accounts.

Alana: And that leads into something else, Liz, where if you have any questions or you're really not sure, it's always a good idea to talk to a professional. At NerdWallet, we love the whole DIY, take-care-of-your-money-yourself mentality. But if you're not sure and you're worried about facing any kind of large tax bill, or you're not sure if you're going to have to pay taxes on your retirement money, it's always a good idea to talk to a CPA or some kind of professional and make sure that your money is going to work for you in the future.

Liz: Alana, I think that's a great idea. And these accounts can be surprisingly complicated. It's not just you ... If you're listening to this and you're confused, it's not just you. Because there are different types of retirement accounts, they have different tax treatments, penalties kick in in different situations. It's really good to have a tax pro to be able to talk to about these things.

Alana: So one other thing to keep in mind is that some accounts like a traditional IRA have what are called required minimum distributions, which means that when you reach a certain age, you actually have to take money out. And that's just something to keep in mind.

Liz: But that's not the case with a Roth IRA, right?

Alana: No, it's not.

Liz: OK.

Sean: All right. Well, Alana, do you have any other thoughts for someone who's in this situation?

Alana: Really, it's just: Start investing for retirement.

Sean: Yeah.

Alana: It doesn't matter if you're 20s and if you're in your 40s. It's never too late to start. And it's always good to start sooner rather than later.

Sean: And one thing that helped me along the way is initially I got my 401(k) through work. I started saving through that. And then I did realize, "Hey, maybe this whole tax diversification thing is something I should look into." And when I did, I realized that a Roth IRA is a great option, and it helps me feel like I'm a little more prepared. It took all of 10 minutes to sign up for one. And now I feel like I'm a little savvier than I was before I did that.

Alana: Yeah.

Liz: Excellent. Good for you.

Alana: And if you're not ready to pick and choose investments on your own, you can open a traditional or a Roth IRA through a robo-advisor, and then it'll pick and choose the investments for you.

Sean: All right. Well, thank you so much for talking with us.

Alana: Yeah, thanks for having me.

Sean: And with that, let's get on to our takeaway tips. Liz, do you want to kick us off?

Liz: It would be my pleasure. First, compare retirement vehicles. Having multiple accounts with different tax structures can help you diversify your retirement portfolio.

Sean: Next step, get the most of your time horizon. Dropping a windfall into your retirement account all at once can help you kick off compounding interest.

Liz: Finally, Roths can also be a backup emergency fund. You can always withdraw your contributions tax- and penalty-free.

Sean: And that is all we have for this episode. Do you have a money question of your own? Turn to the Nerds, and call or text us your questions at 901-730-6373. That's 901-730-NERD. You can also email us at [email protected], and visit nerdwallet.com/podcasts for more info on this episode. And remember to subscribe, rate and review us wherever you're getting this podcast.

Liz: And here's our brief disclaimer thoughtfully crafted by NerdWallet's legal team. Your questions are answered by knowledgeable and talented finance writers, but we are not financial or investment advisors. This Nerdy info is provided for general educational and entertainment purposes and may not apply to your specific circumstances.