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Edy

Curious Investment Question

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Hello. I am curious and would like to hear opinions of others-investors and advisors.

 

The numbers are merely for illustration of the point.

 

Would you prefer to:

 

A. Have a total of $1,200,000 at retirement in investment accounts in IRAs, 403b, 457 (both spouses are teachers) and still owe on the house, the children's college loans, HELOC, credit card, etc.

 

OR

 

B. Have a total of $600,000 and not owe other than perhaps one credit card.

 

I am curious to what other folks think on this. For me, I prefer option A.

 

Thank you for responding,

Edy

 

 

Edy

 

If your investments are earning more than your debt, keep the debt.

 

If your debt is costing you more than you are earning, get rid of the debt.

 

 

Ricky Boobie:

 

1. If the investments earn more than the debt because there is no tax (Roth IRA) should you keep the debt?

 

2. How much does the debt "cost" if it is tax deductible?

 

 

 

I can't understand a word you've said the whole time.

 

 

thats why your advice is not accurate.

 

 

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Guest Skeptical
SNIP Intruder says: This is why you need to talk to a tax advisor or planner.

 

Edy,

 

Judy also wisely suggests that a qualified professional could run the numbers for the scenario(s) you describe and give you an idea of the potential results. Of course that means to AVOID a CPA or other "planner" that sells financial products. Just ask if they are an insurance agent (IA) or registered representative (RR) and if so MOVE ON to the next CPA. Many, many CPAs began to sell products as their tax preparation income was impacted by the wide use of tax prep software and online services by taxpayers. It's too easy for that CPA with an IA or RR license to get a commission on your 403b or sell you products for a Roth IRA. Best of luck!

 

Jim

 

 

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You couldn't spell cat if you were spotted the c and the a.

 

 

Intruder,

 

Sorry for being rude but ricky.bobby is not alone when he says he can't understand a word you say. If you were a teacher, you would be fired within your first year. You seriously do not know how to teach, not to mention your horrible argument skills. Please take some classes in the art of argument.

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You couldn't spell cat if you were spotted the c and the a.

 

 

Intruder,

 

Sorry for being rude but ricky.bobby is not alone when he says he can't understand a word you say. If you were a teacher, you would be fired within your first year. You seriously do not know how to teach, not to mention your horrible argument skills. Please take some classes in the art of argument.

 

 

You need to take some classes on financial planning and taxation which is why I suggested discussing these issues with a tax advisor. If you want to argue with me then answer the questions I posed because they will determine whether it better to pay off debt or keep it. If you dont know what I am talking about you need to see a financial planner who can explain it to you because it is basic financal math.

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Here's my answer to the original question:

 

You can't put a price on "piece of mind". Setting aside tax consequences and differences in interest rates you pay vs. earn, I would go with paying down the debt, especially if you are in retirement or getting close. If your income will/could decrease, you may worry about making your payments.

 

After I paid off the debts, if I was still working, I would take the same amount of money that I was paying each month towards all the debts and continue to "pay" myself by putting it into investments/savings. I would much rather earn interest than pay it. Given enough time and by making payments to yourself, your investments would grow back to their original value, while having no debt. Of course, under the first idea of keeping the investments and making monthly payments on your debts, your debt would also disappear, given enough time.

 

Of course, my preference assumes you don't add on new debt and are disciplined enough to put money into savings each month. But that probably isn't a problem if you amassed the original amount of money through your own efforts (rather than winning the lottery or inheriting it).

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Celia, thank you for your thoughts. Your reply was well considered and was exactly the type of response I was curious to have. I will think on your thinking.

 

Edy

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Hello. I am curious and would like to hear opinions of others-investors and advisors.

 

The numbers are merely for illustration of the point.

 

Would you prefer to:

 

A. Have a total of $1,200,000 at retirement in investment accounts in IRAs, 403b, 457 (both spouses are teachers) and still owe on the house, the children's college loans, HELOC, credit card, etc.

 

OR

 

B. Have a total of $600,000 and not owe other than perhaps one credit card.

 

I am curious to what other folks think on this. For me, I prefer option A.

 

Thank you for responding,

Edy

 

 

Edy

 

If your investments are earning more than your debt, keep the debt.

 

If your debt is costing you more than you are earning, get rid of the debt.

 

 

Ricky Boobie:

 

1. If the investments earn more than the debt because there is no tax (Roth IRA) should you keep the debt?

 

2. How much does the debt "cost" if it is tax deductible?

 

 

 

I can't understand a word you've said the whole time.

 

 

You couldn't spell cat if you were spotted the c and the a.

 

 

Yeah, you sound like a dog with peanut butter on the roof of your mouth.

 

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Edy,

 

My response is somewhat like the notion of someone taking on debt (or not) BECAUSE it is tax-deductible. People are too easily swayed by the idea that part of their payment is being offset by being eligible for lower taxes. Instead of talking about mortgage interest being deductible on Schedule A, think about medical expenses that are deductible on schedule A. Assume you have decent medical insurance. Isn't it better to be in a position to not have to list anything under medical expenses than to list it? Either it means your family was relatively healthy or your insurance covered most of it. Do you know anyone who makes the decision to not take medical insurance so that they can deduct the expenses on their taxes? Obviously it is better to have insurance than to pay for medical expenses JUST TO DEDUCT THEM.

 

This isn't a perfect example (ignoring who is eligible, expenses have to be over a percentage of income, catastrophes, etc), but is how I think about it. As far as your mortgage, is it better to have large payments and a lot of interest to deduct or to pay off the mortgage and not even itemize (assuming that mortgage interest is the largest amount in your itemized deductions)?

 

Instead of making a financial decision BECAUSE OF the tax consequences, make the decision based on the investment/ choice itself. Only if the pros and cons balance each other out, then take the tax considerations into account.

 

I have not always done this myself, but someone else who has a good financial sense (and a fair amount of wealth) has said this to me several times.

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Edy,

 

My response is somewhat like the notion of someone taking on debt (or not) BECAUSE it is tax-deductible. People are too easily swayed by the idea that part of their payment is being offset by being eligible for lower taxes. Instead of talking about mortgage interest being deductible on Schedule A, think about medical expenses that are deductible on schedule A. Assume you have decent medical insurance. Isn't it better to be in a position to not have to list anything under medical expenses than to list it? Either it means your family was relatively healthy or your insurance covered most of it. Do you know anyone who makes the decision to not take medical insurance so that they can deduct the expenses on their taxes? Obviously it is better to have insurance than to pay for medical expenses JUST TO DEDUCT THEM.

 

This isn't a perfect example (ignoring who is eligible, expenses have to be over a percentage of income, catastrophes, etc), but is how I think about it. As far as your mortgage, is it better to have large payments and a lot of interest to deduct or to pay off the mortgage and not even itemize (assuming that mortgage interest is the largest amount in your itemized deductions)?

 

Instead of making a financial decision BECAUSE OF the tax consequences, make the decision based on the investment/ choice itself. Only if the pros and cons balance each other out, then take the tax considerations into account.

 

I have not always done this myself, but someone else who has a good financial sense (and a fair amount of wealth) has said this to me several times.

 

 

I dont understand your logic because there is a difference to the deduction of medical expenses which do not increase the taxpayer's capital asset base and the deduction of mortgage interest which builds up capital assets by paying down the principal with tax deductible interest. The true cost of mge interest is determined after deduction the tax rate, e.g, a 6% mortgage for a taxpayer in the 25% bracket cost only 4.5% (100%-25% =75%(6%)). That means that prepaying the mortgage only nets an investment return of 4.50% which is a lower long term investment return than what most investors can earn in the market. Prepaying debt is advantageous for other types of debt such as credit cards which have higher interest rates of 20% or more and are not tax deductible.

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Intruder,

 

I start out by saying

Setting aside tax consequences and differences in interest rates...
, but you are right. My comparison between medical and mortgage deductions may not be the best but I was trying to make the point that you probably shouldn't make a decision based on just taxes. As far as a house, you need someplace to live, so even if there WEREN'T tax savings on a mortgage, it could still make sense to buy a house and make monthly payments instead of making rent payments. You would at least end up with something of value when you moved. (This may not be true in all parts of the country, but over the long term, our house has gone up more in value than the sum of all the monthly payments! It's been better than putting money into a savings account and we will get it all back some day, with or without mortgage deductions.)

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Celia,

 

As others told me when I joined this community (shoulda listened. Ha!) I think you will discover that it is fruitless to enage the poster aptly named "IntRUDEr". Of course this is a public board and you are free to post as you will. That said, if you click on his/her profile and read the posts you'll discover a trouble maker who stirs the pot looking for a fight. On a conference call his/her line would have been muted by the moderator long ago. Of the hundreds and hundreds of posts I've read on this site his/hers are the only ones containing direct insults and name calling. In my view, boorish behavior is best left ignored.

 

Best,

 

Jim

 

 

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Guest Sierra

Edy,

 

My response is somewhat like the notion of someone taking on debt (or not) BECAUSE it is tax-deductible. People are too easily swayed by the idea that part of their payment is being offset by being eligible for lower taxes. Instead of talking about mortgage interest being deductible on Schedule A, think about medical expenses that are deductible on schedule A. Assume you have decent medical insurance. Isn't it better to be in a position to not have to list anything under medical expenses than to list it? Either it means your family was relatively healthy or your insurance covered most of it. Do you know anyone who makes the decision to not take medical insurance so that they can deduct the expenses on their taxes? Obviously it is better to have insurance than to pay for medical expenses JUST TO DEDUCT THEM.

 

This isn't a perfect example (ignoring who is eligible, expenses have to be over a percentage of income, catastrophes, etc), but is how I think about it. As far as your mortgage, is it better to have large payments and a lot of interest to deduct or to pay off the mortgage and not even itemize (assuming that mortgage interest is the largest amount in your itemized deductions)?

 

Instead of making a financial decision BECAUSE OF the tax consequences, make the decision based on the investment/ choice itself. Only if the pros and cons balance each other out, then take the tax considerations into account.

 

I have not always done this myself, but someone else who has a good financial sense (and a fair amount of wealth) has said this to me several times.

 

 

Celia, that someone else knows what he/she is talking about! I for one believe everyone who can afford the maintenance charges incurred in home ownership should own the roof over their heads. You cannot place a value on hosting family/friends on your patio.

 

Having said that, I realized many years ago that the "dollar profit" generated after selling the home must be reduced by the costs incurred in maintaing the property. Those costs are substantial and substatially cut into the profit. I believe that over a lifetime of owning, rather than renting, the major portion of the profit is nothing more than a return of maintenance costs. And remember, such costs (plumbing repair/upgrade, new roof, cutting and maintenance of lawn and shrubs, painting, snow removal, inside cleaning, etc), are not tax-deductible and do not increase your cost basis.

 

Peace and hope,

Joel L. Frank

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Having said that, I realized many years ago that the "dollar profit" generated after selling the home must be reduced by the costs incurred in maintaing the property. Those costs are substantial and substatially cut into the profit. I believe that over a lifetime of owning, rather than renting, the major portion of the profit is nothing more than a return of maintenance costs. And remember, such costs (plumbing repair/upgrade, new roof, cutting and maintenance of lawn and shrubs, painting, snow removal, inside cleaning, etc), are not tax-deductible and do not increase your cost basis.

 

Peace and hope,

Joel L. Frank

 

Be careful with that last statement, capital improvements do add to your tax basis. So that plumbing "upgrade" could very well give you a few more dollars off the taxable sale of your home later on :)

 

 

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