Author Topic: Taxes  (Read 4671 times)

new2this

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Taxes
« on: February 06, 2013, 02:41:08 PM »
I am doing our taxes and as of right now we will be paying about $2600 total to the fed and state. If we contribute 10k (5 for each of us), our liability goes down to $500. Essentially I am saving $2100 by paying my future self. This would be a no-brainer, the only problem is that we do not have the cash right now. However, we do have our car paid off that we could put up as collateral for a 2.49% interest rate loan. Worst case scenario, it takes me 5 years to pay off (should be more like 1 or 2 years), and I will have paid $635.19 in interest. Pull the trigger?

RoseRelish

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Re: Taxes
« Reply #1 on: February 06, 2013, 03:07:03 PM »
I wouldn't personally take out a loan to fund a retirement account, but your line of thinking is sound. Why not pocket this kernel of knowledge for next year's taxes when you can use cash you've saved to reduce your bill to Uncle Sam?

SunshineGirl

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Re: Taxes
« Reply #2 on: February 06, 2013, 03:11:28 PM »
I probably wouldn't take out a loan to do that, either. However, it's not one or the other. Put aside what you can in a retirement account, and your tax bill will be reduced proportionately.

bigchrisb

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Re: Taxes
« Reply #3 on: February 06, 2013, 04:27:57 PM »
I've taken out loans to play tax games before.  However, when I've done this, it has been on the knowledge that I could pay it off within a few months, as opposed to a few years. 

You owe $2100 in taxes, so I'm assuming you already have the cash to pay that?  i.e. by saving the $1600 in tax payable, you would need to find (borrow) $8.4k.  In other words, you are getting an instant 19% return on the borrowings.  What is your actual savings rate like? i.e. if you targeted repayment of this loan, how soon could you pay off the $8.4k? If you can get that down to less than 6 months (an arbitrary number!), I'd say go for it.

That said, this is coming from someone who burnt his fingers buying stocks through the GFC from 0% balance transfers, so take it with a grain of salt!

Self-employed-swami

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Re: Taxes
« Reply #4 on: February 06, 2013, 04:40:51 PM »
I would only borrow for tax-deferred investment accounts, if you can pay it off really quickly.  I wouldn't take out a loan for longer than 3-6 months myself.

Self-employed-swami

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Re: Taxes
« Reply #5 on: February 06, 2013, 04:42:28 PM »
Also, if you are going to borrow against a car, and get that much $$$, maybe you should just sell the car instead?  If it is worth that much, you might be driving too new of a car.

Crash87

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Re: Taxes
« Reply #6 on: February 06, 2013, 04:44:04 PM »
I also vote just pay the tax. Something may happen that hinders your ability to repay the loan. Paying the tax is the risk-free option in my mind.

I also absolutely hate the idea of losing my debt-free status.

Posthumane

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Re: Taxes
« Reply #7 on: February 06, 2013, 04:59:11 PM »
Hmm. I find it odd how many people on here advocate keeping low rate mortgages since the interest is below inflation and you could earn more investing, and yet it seems most people that have commented so far are against taking out a low interest loan to put into a retirement account, which has an immediate benefit combined with the fact that the retirement account can earn a higher rate than that too. I say if you're comfortable carrying that low rate debt and you are sure you can pay it off in a reasonable time frame then borrowing is a good way to go. I had considered borrowing to fund my RRSP (also a below inflation rate loan) until I realized how little contribution room I actually have.

twinge

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Re: Taxes
« Reply #8 on: February 06, 2013, 05:07:09 PM »
Yeah, I'm on the side of that sounds like it makes possilbe sense to me (as long as there's not a big origination fee or other hidden costs your not thinking of)  The only reason I hesitate is that I'm wondering why you don't have the cash and why it will take that long to pay off 10K.  It sounds to me that you're not living far enough below your means--and aren't ready to handle any emergencies that come up but I don't really have enough info.  So my vote would be a qualified yes to do it if you were absolutely sure you're able and will pay it off asap and start getting more planful about tax-advantaged saving.

bigchrisb

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Re: Taxes
« Reply #9 on: February 06, 2013, 05:13:05 PM »
I'm slightly more cautious about doing this into retirement accounts, as there is less accessibility to the funds.  Doing this with post tax savings means you can un-wind the position at any time.  I don't know about the rules where you are, but at least here, I wouldn't be able to touch the retirement money for 30 years.  Hence if things came unstuck, I'd be stuck with the debt now, and unable to liquidate the asset.

Sounds like the crucial question is about time frames and how many months savings you are bringing forward.  If its a couple of months, game away!  If its years, then forget it, or figure out how to increase that savings rate.

new2this

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Re: Taxes
« Reply #10 on: February 06, 2013, 06:34:47 PM »
Thanks for the feedback. The reason we don't have any cash built up is because we just recently became debt free, and we used what cash we had to sell our townhome.

Also, if you are going to borrow against a car, and get that much $$$, maybe you should just sell the car instead?  If it is worth that much, you might be driving too new of a car.

The family car is a 05 Acura MDX which can't be downsized since we will be a family of 6 come springtime. Normally we would be able to pay off the loan in less than 6 months easily, but we will be losing my part-time income when the baby comes and our savings rate will drop.