Author Topic: Pay off debt or invest  (Read 731 times)

JMS

  • 5 O'Clock Shadow
  • *
  • Posts: 2
Pay off debt or invest
« on: November 04, 2018, 02:30:48 AM »
Hi all, long time reader of the blog but first time poster.

My wife and I have recently paid off the mortgage on our home - awesome! 

Our only liability is a $200k business loan @ 5%.  We have also accumulated another $200k since paying off our mortgage which is sitting in the bank earnings very little.

The question is,  do we pay off the business loan which is tax deductible or do we start investing into an ETF or the like?    The interest on the business loan is tax deductible so the gross return on investing the $200k would need to be around 6.1%. 

Thanks in advance




MDM

  • Walrus Stache
  • *******
  • Posts: 9415
Re: Pay off debt or invest
« Reply #1 on: November 04, 2018, 10:47:23 AM »
...so the gross return on investing the $200k would need to be around 6.1%. 
Is that due to the 20% QBI deduction, or some other reason that the gross return would not need to be the same 5% for a break-even?

JMS

  • 5 O'Clock Shadow
  • *
  • Posts: 2
Re: Pay off debt or invest
« Reply #2 on: November 04, 2018, 12:31:33 PM »
...so the gross return on investing the $200k would need to be around 6.1%. 
Is that due to the 20% QBI deduction, or some other reason that the gross return would not need to be the same 5% for a break-even?

Not sure what QBI is (I'm not in the US) but no.  I'd need to earn a return of 6.1% so that after tax it covered the cost of the 5% interest on the debt.

The investment would be in my personal capacity not in the business.

MDM

  • Walrus Stache
  • *******
  • Posts: 9415
Re: Pay off debt or invest
« Reply #3 on: November 04, 2018, 05:21:13 PM »
...so the gross return on investing the $200k would need to be around 6.1%. 
Is that due to the 20% QBI deduction, or some other reason that the gross return would not need to be the same 5% for a break-even?

Not sure what QBI is (I'm not in the US) but no.  I'd need to earn a return of 6.1% so that after tax it covered the cost of the 5% interest on the debt.

The investment would be in my personal capacity not in the business.
Do you not get to deduct the interest on the loan as a business expense?  If you do, and the business income tax rate is the same as your personal tax rate, the investment need only return the same pre-tax 5% to have the same after-tax effect.