The age old question

[detlef]

What if your loss of job or something like a disability happens while you are paying off the house early? It's a lot harder to borrow money when you can't qualify for the payments without a job. I would suggest a tax free muni or insurance annuity, which I am currently in with a guarantee of a 7.2% and should I need the money I can withdraw 20% without penalty. Det's mortgage is only costing him about 3.24% if he is in a 30% tax bracket...

[Big Country]

What if your loss of job or something like a disability happens while you are paying off the house early? It's a lot harder to borrow money when you can't qualify for the payments without a job. I would suggest a tax free muni or insurance annuity, which I am currently in with a guarantee of a 7.2% and should I need the money I can withdraw 20% without penalty. Det's mortgage is only costing him about 3.24% if he is in a 30% tax bracket...

 

 

Can you find something paying near that right now? Serious question, as I peruse and follow some financial boards with some very brilliant minds that focus in on maximizing gains (were talking analyzing the early withdrawal penalties on CDs to calculate the actual rate of return oveer varying periods of time to determine if getting say 2.4% on a 5year CD with a 3 month interest penalty is better than a 1.9% 2 year CD, etc.) They also track a lot of these types of vehicles and I know I have not seen in a very long time anyone on these sites suggesting any sort of annuity or tax free munis paying close to that... at least with zero risk when discussing the munis.

[sundaynfl]

 

Det. I hope that you have met with an estate planner or plan to at sometime in the near future. Being self employed and owning two places, IMHO you need to proetect yourself more than the average person. If your house is in a trust or just your wife's name it would be harder for someone to come after that asset if it is in either of those titles. It is also harder for someone to take something from you that has little or no equity.

 

This is not just for self employed people but for anyone that owns a home! IE someone slips on your sidewalk and sues...etc... I am an optimistic person, but like to prepare for the worst.

 

Edited since my spelling sucks today!

Edited March 10, 2011 by sundaynfl

[Big Country]

Here is something I provided to a friend asking similar questions last year.

 

General rule of thumb from most financial advisers I have talked to, and this is assuming you have a solid 6-8 months if not more of liquid savings for an emergency fund:

 

1. 401K up to employer match

2. Roth IRA maxed out for you and wife

3. max out 401K

4. Payoff as much extra towards consumer debt as you can(ie credit card, car loans, student loans, etc.)

5. Extra towards principle on mortgage if you have one.

6. Fund a 529 plan for kids higher education

7. Investment account - simplest plan is stick with Index funds, Vanguard has low fees. Most studies I have read show that even top investment advisers and mutual fund managers rarely beat the market long term.

8. Buy some toys for yourself or your wife, maybe a separate vacation fund account, etc.

 

Sometimes flip 3 and 4 if you are carrying significant debt at high interest rates.

 

Note that I am not a financial professional, but I have been looking at my current situation a lot lately with baby #3 almost here, and reading tons from various financial sites and writers and even looking at the suggestions of folks like Dave Ramsey, Suze Orman, Clark howard, etc.

 

 

I realize that the 401K pieces don;t apply to you, but, from all I have researched/read, this order of attack is a fairly solid strategy to improve retirement savings, reduce debt and maximize cash flow

[Ursa Majoris]

Here is something I provided to a friend asking similar questions last year.

 

 

 

 

I realize that the 401K pieces don;t apply to you, but, from all I have researched/read, this order of attack is a fairly solid strategy to improve retirement savings, reduce debt and maximize cash flow

I thought you couldn't do both two and three? Or is that above a certain income threshold?

[Big Country]

I thought you couldn't do both two and three? Or is that above a certain income threshold?

 

 

You can do both, they are separate plans.

 

401K is through an employer, thus need an employer that offers one (there are Individual 401K plans out there for self employed individuals). Max contribution is $16,500 per year - $22K after age 50 or 55, I forget offhand which(technically can do more with post tax money, up to I believe $50K a year total, but that is another discussion)

 

ROTH IRA does have income limits (I believe $110K individual, can't recall), but is an individual plan, separate of any employer plan. Contribution limit is $5K per year ($6K after a certain age, again either 50 or 55, forget which). Contributions are post tax and all gains within the plan are tax free upon withdrawal.

 

If you do not qualify income wise for a ROTH IRA, can do a traditional IRA, same limits, up to $5K ($6K at certain age), but those are tax deferred (contributions are deducted from your gross income at tax time, but you are taxed on contributions and gains at withdrawal). Current regulations allow doing what is knows as a "backdoor ROTH" as it allows you to get around the income caps of a ROTH IRA, in which you make contributions to a traditional IRA and then have it recharacterized as a ROTH IRA. You do pay tax on the amount converted (as it went in tax deferred), but then get the tax free earnings and withdrawals.

[Ursa Majoris]

You can do both, they are separate plans.

 

401K is through an employer, thus need an employer that offers one (there are Individual 401K plans out there for self employed individuals). Max contribution is $16,500 per year - $22K after age 50 or 55, I forget offhand which(technically can do more with post tax money, up to I believe $50K a year total, but that is another discussion)

 

ROTH IRA does have income limits (I believe $110K individual, can't recall), but is an individual plan, separate of any employer plan. Contribution limit is $5K per year ($6K after a certain age, again either 50 or 55, forget which). Contributions are post tax and all gains within the plan are tax free upon withdrawal.

 

If you do not qualify income wise for a ROTH IRA, can do a traditional IRA, same limits, up to $5K ($6K at certain age), but those are tax deferred (contributions are deducted from your gross income at tax time, but you are taxed on contributions and gains at withdrawal). Current regulations allow doing what is knows as a "backdoor ROTH" as it allows you to get around the income caps of a ROTH IRA, in which you make contributions to a traditional IRA and then have it recharacterized as a ROTH IRA. You do pay tax on the amount converted (as it went in tax deferred), but then get the tax free earnings and withdrawals.

This is what I thought. Worth noting that you can't do a maxed-out 401k and a traditional IRA together because that would be too much tax-deferred money.

[Azazello1313]

Here is something I provided to a friend asking similar questions last year.

 

 

 

 

I realize that the 401K pieces don;t apply to you, but, from all I have researched/read, this order of attack is a fairly solid strategy to improve retirement savings, reduce debt and maximize cash flow

 

that looks pretty solid, but I would think #4 should probably be more like #2 depending on the interest rates involved.

[Big Country]

This is what I thought. Worth noting that you can't do a maxed-out 401k and a traditional IRA together because that would be too much tax-deferred money.

 

 

As far as I know, this is not true.

 

There is a cap of $16,500 for 401K

 

There is a cap of $5K for IRA

 

These caps are completely independent of one another.

 

I know this because I currently max out my 401K and have been contributing to a traditional IRA (previous 401K conversion that I plan to convert to a ROTH once I calculate tax effect)

 

Article 1 indicating this

 

Article 2 indicating this

 

The only thing affected is the type of IRA you are eligible to contribute to

[Ursa Majoris]

As far as I know, this is not true.

 

There is a cap of $16,500 for 401K

 

There is a cap of $5K for IRA

 

These caps are completely independent of one another.

 

I know this because I currently max out my 401K and have been contributing to a traditional IRA (previous 401K conversion that I plan to convert to a ROTH once I calculate tax effect)

 

Article 1 indicating this

 

Article 2 indicating this

 

The only thing affected is the type of IRA you are eligible to contribute to

Well, you live and learn I guess. Thanks.

[detlef]

Det. I hope that you have met with an estate planner or plan to at sometime in the near future. Being self employed and owning two places, IMHO you need to proetect yourself more than the average person. If your house is in a trust or just your wife's name it would be harder for someone to come after that asset if it is in either of those titles. It is also harder for someone to take something from you that has little or no equity.

 

This is not just for self employed people but for anyone that owns a home! IE someone slips on your sidewalk and sues...etc... I am an optimistic person, but like to prepare for the worst.

 

Edited since my spelling sucks today!

I don't own jack. I'm manager of one member managed LLC by virtue of majority shares and I'm declared manager in a manager managed LLC by virtue of the operating agreement. I also don't own my home, my wife does, and for exactly the reasons you give. Because her name is nowhere to be found on any of the businesses. I am the guarantor on the leases for both places so that's a bit nerve racking. But, fortunately, my attorney built limits into how badly they can castrate me in the event that I go belly up.

[detlef]

that looks pretty solid, but I would think #4 should probably be more like #2 depending on the interest rates involved.

xactly, especially the credit cards. Which, btw, is not a factor in our situation. We haven't carried a balance on any of our cards for at least 5 years.

[frenzal rhomb]

What if your loss of job or something like a disability happens while you are paying off the house early? It's a lot harder to borrow money when you can't qualify for the payments without a job. I would suggest a tax free muni or insurance annuity, which I am currently in with a guarantee of a 7.2% and should I need the money I can withdraw 20% without penalty. Det's mortgage is only costing him about 3.24% if he is in a 30% tax bracket...

I see where you are coming from - however, my wife and I combine for six figures, we both have group and individual disability policies paid for with post tax dollars - no integration of the policies (except the group would integrate Soc Security if awarded) - I have a roth, 401k and a 403 b, 12 Cds that come due on the first of each month (not much in each but enough to cover a years worth of expenses). I feel confident that we can survive a disability, job loss is a little scarier but right now, Im going for the reduction of my mortgage and the liberation. My house will be paid by the time Im 43 - barring aforementioned issues. - then I have 19 years to squirrel it away and then its blow and hookers (dont tell the wife).

 

Plus zero credit card debt

Edited March 11, 2011 by frenzal rhomb

[Ursa Majoris]

I'm declared manager in a manager managed LLC

[paulzale]

OK, I like Big Country's list and follow that myself.

 

If you are worried about the future take out a HELOC now and then if you lose your job you still have those funds available, take it out for the max possible and let it sit. Could even bump it up from time to time as you gain more equity in the house.

 

The second concern I think you mention is the loss of the tax write off. DON'T worry about this for the following reason:

 

Example:

You pay $100 in interest to bank, you write off this interest on your taxes, but the government does not do dollar for dollar and you usually get only 30% or less back off the bottom line of your taxes, so you still paid $70 more than if you didn't have that interest to pay!

 

Pay off the cars then the mortgage, we are 11 years from paying off our mortgage and have no other debt at this time. I need to open a HELOC while I am thinking about it!

[Azazello1313]

The second concern I think you mention is the loss of the tax write off. DON'T worry about this for the following reason:

 

Example:

You pay $100 in interest to bank, you write off this interest on your taxes, but the government does not do dollar for dollar and you usually get only 30% or less back off the bottom line of your taxes, so you still paid $70 more than if you didn't have that interest to pay!

 

well, of course, but it does factor into the relative rates of interest and return when you're trying to compare paying off equity versus some other investment.

[Caveman_Nick]

I'll take the guaranteed several hundred thousand dollars and extra cash flow in my life every day, please.

[Big Country]

well, of course, but it does factor into the relative rates of interest and return when you're trying to compare paying off equity versus some other investment.

 

very true, you basically reduce your interested by your tax rate... so, if you are in the 25% federal tax bracket, you are essentially reducing your mortgage interest rate by 25% for purposes of the calculation.

 

Another thing to consider, if I recall, is if you do not itemize your deductions but rather take the standard deduction, then you basically aren't even writing off any of the interest.

[yo mama]

A "manager-managed" LLC is merely one that gives control to a manger (who can be anyone) rather than the owners.

[Ursa Majoris]

A "manager-managed" LLC is merely one that gives control to a manger (who can be anyone) rather than the owners.

I figured that but it still looked

[Atlanta Cracker]

BC's list is spot on. Before deciding where to spend extra $$ though you should have at least 6-12 months living expenses banked in safe and liquid vehicles IMO. That avoids the issue of needing to tap your home equity at a bad time in the housing cycle. Then if there are job issues and you have been paying down the mortgage you can survive until the cash flow gets better.

[montster]

+1

 

absolutely no reason to carry debt on your car as you get no benefit and their rates are usually high

 

We were able to get a 2 percent rate for a 36-month car loan through our credit union. I couldn't believe rates were that low. We pay $13 per month to borrow $15,000. We actually qualified for .9 percent through the dealer, but we turned it down.

[Azazello1313]

very true, you basically reduce your interested by your tax rate... so, if you are in the 25% federal tax bracket, you are essentially reducing your mortgage interest rate by 25% for purposes of the calculation.

 

Another thing to consider, if I recall, is if you do not itemize your deductions but rather take the standard deduction, then you basically aren't even writing off any of the interest.

 

well, you're reducing your mortgage rate by your tax rate (say 25%) IF you itemize and you'd itemize even without the mortgage deduction. if your deductible mortgage interest makes up part of the difference between the standard deduction and your itemized deduction (and this is probably true for most people unless you give a lot to charity), then you're effectively reducing your mortgage rate by something less than your tax top marginal tax rate. how much depends on how many other deductions you have. but you're still effectively reducing it.

[polksalet]

We are taking our savings and buying a metal house on our land, That will free us of this brick house and let us pay off our land much earlier. In theory we will be totally debt free in 16-18 months, in theory. But if we fall short life will still be good. I figure that once you have a paid for place and vehicles you are in a good financial situation. Now I could keep paying on this place and put our savings in a cd but I don't see the gain.

[Big Country]

If looking for places to stash your emergency fund and even short term savings that you need to be able to keep relatively liquid, consider reading these two articles:

 

CD Rates Ticking Up

 

Highest Yielding Safe Places for Cash

 

 

As he notes, Ally Bank has a 5-year CD paying about 2.4% right now. The best part is that they offer it with only a 60 day simple interest penalty. Most top online savings accounts that I've seen lately are in the very low 1 percent range, maybe topping at the 1.3ish range. You get that after just 5 months in the CD, and if you keep your money in there for a year, you are at a 2% equivalent rate, nearly double the top savings account rate and way more than any money market I have seen. If you read some of the other related articles, the recommendation is not to put all your money into a single CD and have to break it if you need some cash, but rather by a slew of them. For example, if your emergency fund is $50K, buy 10 CDs for $5K a piece so then if you need the cash, you only cash in those CDs that you need to meet your immediate cash needs and keep earning the higher return on the rest of your money.

 

Many other institutions have much stiffer early withdrawal penalties, either years of interest or often times they even charge the difference between the rate you are at and the rate you could get, assuming it has gone up, so that you can;t effectively cash in the CDs and reinvest the money at a higher rate.