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delay loan by 6 mos in order to save pretax $?

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  • delay loan by 6 mos in order to save pretax $?

    I need sage advice and maybe someone with a calculator who can show be the pros/cons of my situation.  Should I put extra 30k in pretax retirement or pay down loan.

    2 loans:

    a)  50k heloc @6%, int only payments.

    b)  30k @ 2.5%, student loans

     

    available monies

    a)  investment that pays out $63k on 6/1/2018

    b)  current 30k in bank to use immediately

     

    Options:

    1.  Additional retirement:  put 30k into pretax acct.  Thus, save 15k in taxes.  continue to payoff loans on monthly basis.  I'm paying principal down on the heloc.  6/1: pay down remaining heloc (~40k), apply 23k towards student loan payoff; still owe 3k on student loan;

    a)  rough out of pocket cost by 6/2018:   30k (pretax retirement) - 15k (tax savings) + 50k (heloc) + 30k (stud loan) + 1.75 k (heloc interest 6 mos) + .36k (stud loan interest)  - 83k (6/1/2018 investment return) = $14k

     

     

    2.  No additional retirement: pay 30k down on heloc;  pay taxes, so additional 15k;  6/1/2018: pay off heloc (~10k), pay off stud loan (26k); 27k remaining in cash

    a)  rough out of pocket cost:  30k (heloc) + 15k (taxes) + 20k (remaining balance heloc) + 30k (stud loan) + 0.6k (heloc int x 6 mos) + .4k (stud loan interest x 6 mos) - 83k (6/1/2018 investment return) = $13k

     

    Based on the above, I think I should go with option #1.

    What am I missing?

     

    thanks

  • #2
    Your analysis isn’t correct, but I think it is better to put the $30k into pre-tax retirement, pay down the HELOC with the $15k in tax savings, leaving $35k of HELOC. Effectively you are borrowing $15k at the HELOC interest rate of 6% for 6 months to fund your pre-tax account. That will cost you about $450, or 1.5% of $30k. Retirement contributions not made in a year are lost forever, and the tax free growth on the $30k will offset the $450 fee assuming you hold for any reasonable length of time.

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    • #3
      I agree with Donnie you should not even think about another use for your money until all tax deferred space is filled up.

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      • #4
        Choice 1. The reason is that you are exchanging either 1) asset for asset or 2) decreasing both an asset and a liability. Both of these options are a wash; iow, they do not increase or decrease your net worth.

        Therefore, it gets down to the tax savings, which actually increases your balance sheet by $15k. I am ignoring the interest saved and the fact that you will pay taxes on the $15k when it comes back out in retirement (since it may even go to the next generation   ), just as I am ignoring the growth potential of your increased retirement savings. The $15k tax "refund" is the only number that really matters in this exercise.
        Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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        • #5




          Therefore, it gets down to the tax savings, which actually increases your balance sheet by $15k. I am ignoring the interest saved and the fact that you will pay taxes on the $15k when it comes back out in retirement (since it may even go to the next generation  ???? ), just as I am ignoring the growth potential of your increased retirement savings. The $15k tax “refund” is the only number that really matters in this exercise.
          Click to expand...


          I’m not sure it makes sense to completely ignore the future tax liability.  On a nominal basis, it exactly offsets the immediate balance sheet gain.  Maybe you would discount the nominal value if you were building a detailed balance sheet.  In my view the main advantage is getting the capital into an account where it can grow tax free.

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          • #6







            Therefore, it gets down to the tax savings, which actually increases your balance sheet by $15k. I am ignoring the interest saved and the fact that you will pay taxes on the $15k when it comes back out in retirement (since it may even go to the next generation  ???? ), just as I am ignoring the growth potential of your increased retirement savings. The $15k tax “refund” is the only number that really matters in this exercise.
            Click to expand…


            I’m not sure it makes sense to completely ignore the future tax liability.  On a nominal basis, it exactly offsets the immediate balance sheet gain.  Maybe you would discount the nominal value if you were building a detailed balance sheet.  In my view the main advantage is getting the capital into an account where it can grow tax free.
            Click to expand...


            Maybe not, but you have the immediate bird-in-the-hand while the current value of the tax on $15k 30 - 40 years into the future is, imo, negligible. Of course, you'll have growth, which will be taxed, but that's a net gain.
            Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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            • #7
              With a heloc out there at 6%, I'd be tempted to turn down the retirement savings and pay that off.

              Of course it's a good idea to put as much into tax-deferred retirement as possible, but there's a lot of merit to just paying the taxes now and having your money now, so long as you do something responsible with it.  Remember, it's tax-deferred, not tax-free, and $100,000 in the bank is worth a lot more than $100,000 in the retirement account (non-roth obviously).

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