Investment/Debt Related Questions

[Go aeiou]

All my contributions are Roth right now, but I read something in the past that there was an advantage of cycling them to traditional as I get closer to retirement age. Can anyone explain what the benefit to that is?

income is typically lower in retirement so some income is acceptable.
You can decide how much of each IRA to withdraw on your taxable/non-taxable income during the year.

 

[Thunder Good-Oil]

All my contributions are Roth right now, but I read something in the past that there was an advantage of cycling them to traditional as I get closer to retirement age. Can anyone explain what the benefit to that is?

A tax guy needs to confirm, but if non-Roth IRA account will pass to beneficiaries with the same stepped up cost basis tax advantage as non-retirement assets, then a regular IRA shelters the account appreciation and income while never being taxed. Roth’s are taxed on the front end and are then (supposed) to never be taxed again. Of course some politicians will attempt to change the rules after they aren’t able to steal enough money from the people.

 

[Thunder Good-Oil]

IIRC, Roths do not have any minimum required withdrawals rules whereas regular IRAs have the MRW at a certain age.

 

[Go aeiou]

A tax guy needs to confirm, but if non-Roth IRA account will pass to beneficiaries with the same stepped up cost basis tax advantage as non-retirement assets, then a regular IRA shelters the account appreciation and income while never being taxed. Roth’s are taxed on the front end and are then (supposed) to never be taxed again. Of course some politicians will attempt to change the rules after they aren’t able to steal enough money from the people.

Yeah, who knows what the rules will be in the future for a 30 year old today. Life expectancy and politics.
I'm not required to take a RMD until age 73, and then it'll be about 4%. Ouch!
OTOH, when I prepared tax returns I used to love to listen to people complain about making too much money.

 

[Tri-CitiesVol]

Well, showing my ignorance, found out this week that I can only contribute 22.5 between both TSPs. So now I’m having to do a bunch of math to make sure I still get the employer matching contributions the rest of the year. I guess with the money left over I will be starting an IRA. Any suggestions on where to start? I plan to self manage.

 

[95 Vol Alum]

Well, showing my ignorance, found out this week that I can only contribute 22.5 between both TSPs. So now I’m having to do a bunch of math to make sure I still get the employer matching contributions the rest of the year. I guess with the money left over I will be starting an IRA. Any suggestions on where to start? I plan to self manage.

I’m a Vanguard guy and have a Roth there. Make sure you maximize your wife’s account(s) too if you are truly “til death do us part.” Lol

 

[BigOrangeMojo]

Well, showing my ignorance, found out this week that I can only contribute 22.5 between both TSPs. So now I’m having to do a bunch of math to make sure I still get the employer matching contributions the rest of the year. I guess with the money left over I will be starting an IRA. Any suggestions on where to start? I plan to self manage.

Roth for you and spouse. I am a T Rowe Price guy but Vanguard is good as well....

Does your wife have a SEP or SIMPLE IRA for her self employment gig?

 

[sjt18]

After saving up during the covid student loan forbearance, we are ready to write a fat check once the Supreme Court makes their ruling and payments resume. With student loan debt paid off, that will just leave the mortgage (4.5%) and car loan (2.5%.) It has us thinking where our money would be better served, doubling up on loan payments or redirecting funds towards a side hustle.

I think I’m pretty well set for retirement, so ideally I’d like to start generating some passive income that we can use as travel or Vols season ticket money. Any tips for entering the rental property game? Any one with experience franchising businesses? Anyone here buy up property or mineral rights?

30 years old. Married to a target/amazon addict with a little one for context.

There are better investments IMO to residential rentals. Even storage buildings generate good income without the headaches and government interference.

Purchased an 80 acre farm a few years back. About 20 acres are in corn/soybeans. I split the sale with the guy who farms it for me. Just to give you a rough idea, a yield of 130 bu/ac on 20 produces about 2600 bushels @ $6/bu... $15,600 split between us. I have another 24 acres in conservation @ around $150/acre. There is some reinvestment and maintenance but that's all deductible.

We're a lot closer to retirement than you but a solid $8-10K per year long term income is a good part of our plan. There are other investments that make more money but this is a solid income that will grow over time.

If we didn't hunt we could probably rent it for $3000-$4000 per year.

To your exact scenario, 2.5% is cheap money. You can pretty easily invest your money in something gives you a net gain on that. Same with the mortgage except that your interest is usually front loaded.

 

[GoDucks349]

If the 2.5% car loan is fixed and the rate will never go up, DO NOT PAY IT OFF EARLY.

Same with the 4.5% mortgage. If it is a fixed rate then keep it. You can easily invest that money at a higher rate. Although, there is a tax calculation to consider. Your marginal tax rate and whether or not you are taking the standard deduction or itemizing are the key considerations.

As far as investing, there are two questions. The second is what to invest in. Index tracking and/or total market and/ or dividend generating ETFs are good ideas. But the primary, and most important thing, is to put the maximum amount that you can into a ROTH IRA and also put all that you can into a 401(k) (or similar defined contribution plan if you are government worker(s)) at least up to the amount that will be matched by the employer. If you have, or plan to have, kids then the tax advantaged, education savings plans should be taken advantage of as well.

If you want to seek advice on specific investments there is an all things stocks thread in The Pub that kicks that question around regularly.

Again - put every last penny that you can into a ROTH IRA and take advantage of the employer match on their defined contribution plans.

I'm retired from the institutional money management industry and all I want to say is that I've been on this board for sometime and Thunder Good-oil is solid!! Listen to him

 

[bigmac]

Yeah, I get the struggle with the side hustle aspiration. The whole rental property thing is popping off at the moment. I just bought a two-family house. We're living in one unit, and rent out the other. I gotta tell ya, it's definitely hard work, but rent checks coming in each month feels like free money, right? I'd say do your homework, check out neighborhoods, be aware of hidden costs, you know?
Franchising? There’s potential for great profits but also a lot of initial cash splash for startup costs. So tread carefully, do a lot of research beforehand.
I would also recommend using the services of a bankruptcy law center for managing your financial situation. I gotta tell ya, I can't do anything without consulting them first. The financial stress is being kept down to a minimum for us.

 

[SycloneJoe]

I get the math on the Interest rate of your car and house payment but I’ll tell you my personal opinion/advice.

1) I haven’t financed a car in over 20 years because they’re a depreciating asset. Even after a low rate, you’re losing the depreciation too. Pay that sucker off.

2) I was in a similar situation and chose to pay off everything, including the mortgage and I didn’t regret it. There’s a psychological aspect to it. The peace of mind is worth it.

3) You’re 100% correct about about passive income not being totally passive. That why I decided to flip my investment property instead of rent.

 

[Go aeiou]

I get the math on the Interest rate of your car and house payment but I’ll tell you my personal opinion/advice.

1) I haven’t financed a car in over 20 years because they’re a depreciating asset. Even after a low rate, you’re losing the depreciation too. Pay that sucker off.

2) I was in a similar situation and chose to pay off everything, including the mortgage and I didn’t regret it. There’s a psychological aspect to it. The peace of mind is worth it.

3) You’re 100% correct about about passive income not being totally passive. That why I decided to flip my investment property instead of rent.

Where did you reinvest the proceeds?

 

[SycloneJoe]

Where did you reinvest the proceeds?

I paid off my primary residence and maxed out all of our IRA’s & retirement. I did take a bigger tax hit by choosing to be debt free. I did REALLY well on the investment house. Paying the IRS stunk but we were substantially blessed beyond anything I planned with the flip house. I bought it right before the market skyrocketed and had a contract to sell as the Fed first raised rates, at its peak. I always wanted to be debt free before my kids went to college. After being furloughed during Covid, the peace of mind knowing that I owe nothing to anyone, have money in the bank and retirement, is an amazing feeling. You never know what life is going to bring.

 

[Thunder Good-Oil]

I paid off my primary residence and maxed out all of our IRA’s & retirement. I did take a bigger tax hit by choosing to be debt free. I did REALLY well on the investment house. Paying the IRS stunk but we were substantially blessed beyond anything I planned with the flip house. I bought it right before the market skyrocketed and had a contract to sell as the Fed first raised rates, at its peak. I always wanted to be debt free before my kids went to college. After being furloughed during Covid, the peace of mind knowing that I owe nothing to anyone, have money in the bank and retirement, is an amazing feeling. You never know what life is going to bring.

Solid planning. Good job!

 

[Tri-CitiesVol]

Roth for you and spouse. I am a T Rowe Price guy but Vanguard is good as well....

Does your wife have a SEP or SIMPLE IRA for her self employment gig?

Lost track of the thread, but searched it to hopefully get some news questions answered.

She has decided she wants to start building a retirement of her own. Looks like the two options that make the most sense are self 401k or SEP IRA. She would be okay putting in ~10k annually, probably no more than 20k. We are adding our child to S corp payroll, but that would be the only other employee. Does the account she chooses have an impact if more than owner and spouse are on payroll or can the other employee (my child) just not use the same plan?

A follow up question for you all. Can we use the wage that we pay my child and invest it into an IRA for her? I think my accountant said we had to use her wage for expenses she generates. Daycare, school, etc

 

[GoDucks349]

First, I've never paid interest on a car loan. It's a depreciating asset. So just stop sell the damn thing and buy a car for cash.
Second, when it comes to owning homes, really consider moving at a minimum of every 5 years. Assuming home prices are increasing, you and your wife filing joint can have a $500k gain when you sell and reinvest in a new home without having to pay any capital gains. Lots of people buy a place and stay in it for 20-30 years. When they sell they have a capital gain much larger than $500k and they have to pay capital gains on the difference. If they just sell every time the gain is less than $500k they can avoid capital gains tax on the profit. So move often and reap the benefits without the taxes.

 

[Go aeiou]

First, I've never paid interest on a car loan. It's a depreciating asset. So just stop sell the damn thing and buy a car for cash.
Second, when it comes to owning homes, really consider moving at a minimum of every 5 years. Assuming home prices are increasing, you and your wife filing joint can have a $500k gain when you sell and reinvest in a new home without having to pay any capital gains. Lots of people buy a place and stay in it for 20-30 years. When they sell they have a capital gain much larger than $500k and they have to pay capital gains on the difference. If they just sell every time the gain is less than $500k they can avoid capital gains tax on the profit. So move often and reap the benefits without the taxes.

Yeah, we moved to nashville in 2011 and bought a home for $225,000. In 2024 it is worth about $600,000 so it's something to consider.
But we are both in our 70s. I have landscaped for years, and those Japanese Maples grow vey slowly here. I'd like to see them in a few more years.
Dear wife has made this home her nest. Granite in the kitchen, wood floors in every room except laundry and bathrooms, etc.
We ae in a nice neighborhood, and our home is just right for us.
So we are here until at least one of us goes. Then it'll be $250K.
Meh, it might be our children's problem.

In TN most people use a realtor when they sell a home. That commision has typically been 6% of the Sales price,
i.e. $600,000 x 6%= $36,000.
That % might become less, but having to sell a home to avoid income tax becomes just a trade off.
FWIW, we have lived in 13 homes. Maried 43+ years.

 

[distrovol]

Question about selling a house: I bought a house next door years ago during the depths of the recession. I spent the next several years fixing it up and moved into it about 3 years ago. I owe nothing on it now. I still own the original house beside it and have rented it to my sister/ brother-in-law. They now want to buy it. I thought since it was my primary residence 2 out of the last 5 years I would be able to pocket all of the sale (minus what's left of the mortgage). Now my tax preparer says I will be on the hook for CG because it has been a rental, even though not for very long. Assuming this is true, any other options out there to minimize the tax liability?

 

[McDad]

Question about selling a house: I bought a house next door years ago during the depths of the recession. I spent the next several years fixing it up and moved into it about 3 years ago. I owe nothing on it now. I still own the original house beside it and have rented it to my sister/ brother-in-law. They now want to buy it. I thought since it was my primary residence 2 out of the last 5 years I would be able to pocket all of the sale (minus what's left of the mortgage). Now my tax preparer says I will be on the hook for CG because it has been a rental, even though not for very long. Assuming this is true, any other options out there to minimize the tax liability?

You can defer the CG tax indefinitely with a 1031 exchange. You could establish a self directed IRA with your rental inside the IRA which would also defer the CG tax.

 

[Thunder Good-Oil]

Capital Gains Tax on Home Sales

Capital gains taxes on real estate and property can be reduced when you sell your home, up to certain tax limits, if you meet the requirements.

www.investopedia.com

The 2-in-5-Year Rule​

For taxpayers with more than one home, a key point is determining which is the principal residence. The IRS allows the exclusion only on one’s principal residence, but there is some leeway for which home qualifies. The two-in-five-year rule comes into play. Simply put, this means that during the previous five years, if you lived in a home for a total of two years, or 730 days, that can qualify as your primary residence. The 24 months do not have to be in a particular block of time.

 

[distrovol]

You can defer the CG tax indefinitely with a 1031 exchange. You could establish a self directed IRA with your rental inside the IRA which would also defer the CG tax.

Can you elaborate on this a little more?

 

[distrovol]

Capital Gains Tax on Home Sales

Capital gains taxes on real estate and property can be reduced when you sell your home, up to certain tax limits, if you meet the requirements.

www.investopedia.com

The 2-in-5-Year Rule​

For taxpayers with more than one home, a key point is determining which is the principal residence. The IRS allows the exclusion only on one’s principal residence, but there is some leeway for which home qualifies. The two-in-five-year rule comes into play. Simply put, this means that during the previous five years, if you lived in a home for a total of two years, or 730 days, that can qualify as your primary residence. The 24 months do not have to be in a particular block of time.

Does that rule apply if I have been renting it out for the past 2.5 years and claiming that on my taxes (sorry, left that part out)?

 

[McDad]

Can you elaborate on this a little more?

If you were wanting to invest in another property, you can roll the proceeds from the sale of the first property to the second and defer the taxes until the 2nd property sold. The rules are:
1. 2nd property has to be higher value,
2. Must close with in 6 months of sale of 1st property.
3. Properties need to be fairly similar (rentals for example).

You can Google 1031 Rax Deferred Exchange and there's tons of info on it.

An IRA grows tax free. A self directed IRA is simply an IRA that you administrate rather than having a third party choose the investments. A rental property held in an IRA isnt subject to tax until you take distributions from the IRA.

 

[distrovol]

If you were wanting to invest in another property, you can roll the proceeds from the sale of the first property to the second and defer the taxes until the 2nd property sold. The rules are:
1. 2nd property has to be higher value,
2. Must close with in 6 months of sale of 1st property.
3. Properties need to be fairly similar (rentals for example).

You can Google 1031 Rax Deferred Exchange and there's tons of info on it.

An IRA grows tax free. A self directed IRA is simply an IRA that you administrate rather than having a third party choose the investments. A rental property held in an IRA isnt subject to tax until you take distributions from the IRA.

Thank you.

 

[McDad]

Thank you.

My pleasure. Good luck, friend.