HELOC to Maximize Retirement Contribution
HELOC to Maximize Retirement Contribution
We currently have $200K mortgage and a $100K HELOC with $0 balance. Appraised value of the home would be approximately $500K. Our base income is $102K but most of the years we earn an additional $35K.
We are eligible to contribute up to pre-tax $49K in 403(b) and 457(b). During the next nine years, we will be paying college tuition for our children. As a result, we will unable to fully use the tax-advantaged space.
We are thinking of drawing from HELOC as necessary to maximize pre-tax retirement contributions. What are the pros and cons of such an approach? We are 43 and 51 and plan to continue working for another 16 years.
We are eligible to contribute up to pre-tax $49K in 403(b) and 457(b). During the next nine years, we will be paying college tuition for our children. As a result, we will unable to fully use the tax-advantaged space.
We are thinking of drawing from HELOC as necessary to maximize pre-tax retirement contributions. What are the pros and cons of such an approach? We are 43 and 51 and plan to continue working for another 16 years.
"I don't worry too much about pointing fingers at the past. I operate on the theory that every saint has a past, every sinner has a future." -- Warren Buffett
- Devil's Advocate
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Re: HELOC to Maximize Retirement Contribution
I'm sorry but this sounds like an awful idea. Borrowing against your house to fund a tax deferred account so you can pay your children's education. What could go wrong? I suppose losing your house if you become unable to make the payments is the big one.
What about funding a 529 if you are able to deduct from state income taxes and immediately pull that money out. In my state that would save one 8%.
DA
What about funding a 529 if you are able to deduct from state income taxes and immediately pull that money out. In my state that would save one 8%.
DA
Re: HELOC to Maximize Retirement Contribution
Jane Bryant Quinn (and others) recommend funding your retirement before paying for child's college. I would not borrow against a house to pay for either. Kids can secure loans for school, but you can't really borrow for your retirement.
By the time you know enough to choose a good financial adviser, you don't need one. | bogleheads.org is my advisor: The ER is 0.0% and the advice always solid.
Re: HELOC to Maximize Retirement Contribution
I see nothing wrong with the idea. You are essentially a couple with a 35%+ savings rate who needs to tap some home equity to pay college costs. As long as you keep those costs reasonable you should be fine.
Re: HELOC to Maximize Retirement Contribution
How much are you contributing to your retirement accounts now, what is their value, and where are you on your saving versus expected expenses in retirement? What is your projected SS and/or pension payout at FRA (you have a 457, so to me that means there may be a pension )? Without this info, it's difficult to give advice on whether it makes sense to do what you propose (though my knee jerk reaction is that it's a a bad idea).
Maxing retirement accounts is important...but other things are also important. You may already have enough saved such that the extra x dollars per year will not make an appreciable difference versus the risk of borrowing against your home. HELOCs are not fixed rate loans. Would it not be better to get a fixed rate loan to pay for education (which is basically what you're doing, since in effect your shifting retirement money to education and then filling up the empty space with the HELOC money.)
Do you have any Roth money? One option would be to start shifting some of your pre-tax money to Roth, which could then be used to pay for education without penalty (assuming 5 year holding period is fulfilled).
Maxing retirement accounts is important...but other things are also important. You may already have enough saved such that the extra x dollars per year will not make an appreciable difference versus the risk of borrowing against your home. HELOCs are not fixed rate loans. Would it not be better to get a fixed rate loan to pay for education (which is basically what you're doing, since in effect your shifting retirement money to education and then filling up the empty space with the HELOC money.)
Do you have any Roth money? One option would be to start shifting some of your pre-tax money to Roth, which could then be used to pay for education without penalty (assuming 5 year holding period is fulfilled).
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Re: HELOC to Maximize Retirement Contribution
Is this a governmental 457(b)?
If so, I'd consider some of the failure modes carefully and then go ahead very cautiously. If the answer to "what could go wrong" is "I lose my job, become eligible to pull money out of the 457(b), repay my HELOC, and pare down my expectations for travel in retirement" then maybe you're fine.
One thing that you could consider would be holding a position in short-term government bonds in your 457(b) that is (roughly) equal and opposite to the position in the HELOC. Then if the markets drop and you lose your job at the same time, you would get access to the funds in the 457(b), from which you could repay the HELOC. Your overall financial position should then be equivalent to the position if you hadn't used the HELOC and hadn't been able to fill your 457(b). You would achieve a near-zero impact on your net worth and a near-zero impact on the risk of your portfolio, while effectively pushing access to the 457(b) into the future. Then, when your college payments subside, you repay the HELOC, and switch out of bonds into riskier assets (as appropriate to your risk tolerance).
Before doing that, I'd check whether the HELOC would be call-able if market conditions turn but your job is stable? What would you do then? Similarly, as 457(b) withdrawals are treated as income, what would be the income tax impact of pulling money out of the HELOC if you needed to repay nine years' worth of drawdowns in a hurry?
Don't believe everything you read on the internet. Check your facts, especially if you got them from my posts on the internet.
Re: HELOC to Maximize Retirement Contribution
OP,
1) What do you hope to accomplish by doing this? Saving tax?
https://www.irs.gov/credits-deductions/individuals/aotc
At your income and tax level, you will pay little to no tax while your kids are going to college. In fact, you want to make sure that you have enough taxable income in order to claim the refundable portion of the AOTC tax credit.
Now, if you are not going to save tax by doing this, why are you doing it?
2) How many kids do you have? What are their ages?
3) How do you come up with the number of 49K?
KlangFool
1) What do you hope to accomplish by doing this? Saving tax?
https://www.irs.gov/credits-deductions/individuals/aotc
At your income and tax level, you will pay little to no tax while your kids are going to college. In fact, you want to make sure that you have enough taxable income in order to claim the refundable portion of the AOTC tax credit.
Now, if you are not going to save tax by doing this, why are you doing it?
2) How many kids do you have? What are their ages?
3) How do you come up with the number of 49K?
KlangFool
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Re: HELOC to Maximize Retirement Contribution
Employer contributes 16% of base pay in 403(b). Our average contribution to 403(b)/457(b) has been 19K/year for the last 16 years. Contributed $0 in some years and maximum $48K in 2017. We have $825K in 403(b)/457(b) and $75K in Roth IRAs. Recent SS statement stated that the older spouse will receive $2,480 at full retirement age. Younger spouse does not have any SS work credit. We will not receive any pension payment. Our expected retirement expenses will be about $100K/year. Thank you for your feedback.Admiral wrote: ↑Mon Nov 20, 2017 9:14 am How much are you contributing to your retirement accounts now, what is their value, and where are you on your saving versus expected expenses in retirement? What is your projected SS and/or pension payout at FRA (you have a 457, so to me that means there may be a pension )? Without this info, it's difficult to give advice on whether it makes sense to do what you propose (though my knee jerk reaction is that it's a a bad idea).
"I don't worry too much about pointing fingers at the past. I operate on the theory that every saint has a past, every sinner has a future." -- Warren Buffett
Re: HELOC to Maximize Retirement Contribution
Fixed (or at least low adjustable) rate? If so, I’d consider it as long as you have it budgeted to pay down reasonably. Shame to miss tax-advantaged space—unless the cost is high.
Re: HELOC to Maximize Retirement Contribution
It is non-governmental tax-exempt organization's 457(b). The HELOC is not call-able unless I fail to maintain the property and so on; there is a long list. I feel my position as pretty stable; it has been that way for the last 15 years. Thank you for your thought.stephen408 wrote: ↑Mon Nov 20, 2017 9:43 am Is this a governmental 457(b)? ... Before doing that, I'd check whether the HELOC would be call-able if market conditions turn but your job is stable? What would you do then?
"I don't worry too much about pointing fingers at the past. I operate on the theory that every saint has a past, every sinner has a future." -- Warren Buffett
Re: HELOC to Maximize Retirement Contribution
1) Not to save tax but to get tax-free growth. If I do not use the tax-advantaged space, I am going to lose it. Once the kids are out of college, I will be able to payback the HELOC easily. I have just checked, this year I will pay $3,800 for federal tax after receiving AOTC and child tax credit.KlangFool wrote: ↑Mon Nov 20, 2017 9:55 am 1) What do you hope to accomplish by doing this? Saving tax?
https://www.irs.gov/credits-deductions/individuals/aotc
At your income and tax level, you will pay little to no tax while your kids are going to college. In fact, you want to make sure that you have enough taxable income in order to claim the refundable portion of the AOTC tax credit. Now, if you are not going to save tax by doing this, why are you doing it?
2) How many kids do you have? What are their ages?
3) How do you come up with the number of 49K?
2) Two kids: 13 and 18 - the older one started college.
3) The older spouse's employer offers both 403(b) and 457(b). Under present law -- which can change soon -- in 2018, total contribution can be maximum $24,500 + $24,500 for person at 50 or over. Thank you for your feedback.
"I don't worry too much about pointing fingers at the past. I operate on the theory that every saint has a past, every sinner has a future." -- Warren Buffett
Re: HELOC to Maximize Retirement Contribution
Shikoku,Shikoku wrote: ↑Mon Nov 20, 2017 10:39 pm1) Not to save tax but to get tax-free growth. If I do not use the tax-advantaged space, I am going to lose it. Once the kids are out of college, I will be able to payback the HELOC easily. I have just checked, this year I will pay $3,800 for federal tax after receiving AOTC and child tax credit.KlangFool wrote: ↑Mon Nov 20, 2017 9:55 am 1) What do you hope to accomplish by doing this? Saving tax?
https://www.irs.gov/credits-deductions/individuals/aotc
At your income and tax level, you will pay little to no tax while your kids are going to college. In fact, you want to make sure that you have enough taxable income in order to claim the refundable portion of the AOTC tax credit. Now, if you are not going to save tax by doing this, why are you doing it?
2) How many kids do you have? What are their ages?
3) How do you come up with the number of 49K?
1) If you use those tax-advantaged space, you will pay more tax in the future. Plus, paying interest on the HELOC now. So, why do you want to do this?
2) Even assuming that you contribute to Roth 403b and Roth 457, you probably do not save enough tax to justify paying interest to HELOC.
3) Your income and asset level do not justify doing this stuff.
KlangFool
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Re: HELOC to Maximize Retirement Contribution
You appear to be in pretty good shape, financially, for FI, based on your ages and current plans to continue working. If you can, I would keep contributing as much as possible to your pre-tax accounts, but I would not take a HELOC in order to max them. You would not be the first, nor the last, to cut back on retirement contribs in order to fund college for your kids.Shikoku wrote: ↑Mon Nov 20, 2017 10:08 pmEmployer contributes 16% of base pay in 403(b). Our average contribution to 403(b)/457(b) has been 19K/year for the last 16 years. Contributed $0 in some years and maximum $48K in 2017. We have $825K in 403(b)/457(b) and $75K in Roth IRAs. Recent SS statement stated that the older spouse will receive $2,480 at full retirement age. Younger spouse does not have any SS work credit. We will not receive any pension payment. Our expected retirement expenses will be about $100K/year. Thank you for your feedback.Admiral wrote: ↑Mon Nov 20, 2017 9:14 am How much are you contributing to your retirement accounts now, what is their value, and where are you on your saving versus expected expenses in retirement? What is your projected SS and/or pension payout at FRA (you have a 457, so to me that means there may be a pension )? Without this info, it's difficult to give advice on whether it makes sense to do what you propose (though my knee jerk reaction is that it's a a bad idea).
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Re: HELOC to Maximize Retirement Contribution
You might want to check out a book called the Value of Debt in Building Wealth. In the end you have a series of expenses, investments, debts, and potential debts (liquidity). Look at them all as one system as a company would rather than in isolation. You can pay cash for tuition and not invest or take out debt to pay tuition and then invest. I'd make the decision based on three factors: my total debt, cost of that debt (including deductibility of interest), and my liquidity. If your total debt is still a low percentage of your net worth and you have access to ready sources of cash in case of emergency (401k loans, more on the HELOC, etc.), it makes sense to use the HELOC. If it is going to swamp you in debt or make it so you don't have enough cash to fix the furnace, then I'd defer the retirement contributions. Or if the interest on the HELOC is high I'd consider finding another loan source.
But you can do lots of things to optimize. If you could refinance on an interest only mortgage, that could improve short term liquidity but increase your long term payments. You have to be disciplined to manage this so maybe not the best idea. Also you should check into the tax implications. The interest you would pay on the HELOC might be at least partially tax deductible if used for tuition though the latest tax bill could change some things so you might want to allocate the HELOC funds to tuition rather than retirement so you can deduct the interest.
But you can do lots of things to optimize. If you could refinance on an interest only mortgage, that could improve short term liquidity but increase your long term payments. You have to be disciplined to manage this so maybe not the best idea. Also you should check into the tax implications. The interest you would pay on the HELOC might be at least partially tax deductible if used for tuition though the latest tax bill could change some things so you might want to allocate the HELOC funds to tuition rather than retirement so you can deduct the interest.
Re: HELOC to Maximize Retirement Contribution
KlangFool,
Thank you. I thought that I will accumulate wealth if I pay a lower rate for HELOC than the rate of return of my investments. Is this true? Certainly, when future tax rate is incorporated, things get pretty complicated. I have never paid federal tax at a higher rate than 15%. I need to guess how it will be for me in retirement.
"I don't worry too much about pointing fingers at the past. I operate on the theory that every saint has a past, every sinner has a future." -- Warren Buffett
Re: HELOC to Maximize Retirement Contribution
Admiral,
You said it very well! I agree.
"I don't worry too much about pointing fingers at the past. I operate on the theory that every saint has a past, every sinner has a future." -- Warren Buffett
Re: HELOC to Maximize Retirement Contribution
Betablocker,betablocker wrote: ↑Tue Nov 21, 2017 10:20 am You might want to check out a book called the Value of Debt in Building Wealth. ... The interest you would pay on the HELOC might be at least partially tax deductible if used for tuition though the latest tax bill could change some things so you might want to allocate the HELOC funds to tuition rather than retirement so you can deduct the interest.
Thank you for your suggestions. That sounds like a good read. I agree, the latest tax bill could change a lot of things.
"I don't worry too much about pointing fingers at the past. I operate on the theory that every saint has a past, every sinner has a future." -- Warren Buffett
- whodidntante
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Re: HELOC to Maximize Retirement Contribution
I think it's fine so long as you have significant taxable assets to ride through a lengthy loss of income, if that's a possibility you need to prepare for.
Re: HELOC to Maximize Retirement Contribution
Shikoku,Shikoku wrote: ↑Wed Nov 22, 2017 12:06 amKlangFool,
Thank you. I thought that I will accumulate wealth if I pay a lower rate for HELOC than the rate of return of my investments. Is this true? Certainly, when future tax rate is incorporated, things get pretty complicated. I have never paid federal tax at a higher rate than 15%. I need to guess how it will be for me in retirement.
<<Our base income is $102K but most of the years we earn an additional $35K.>>
<< I have just checked, this year I will pay $3,800 for federal tax after receiving AOTC and child tax credit.>>
You are paying $3,800 tax with gross income of either 102K or 137K. Your effective tax rate is 3.8% or lower. Why would you want to defer paying tax at this rate? It is unlikely that you will get a lowered rate any other time in your life. Even assuming 10% tax rate at retirement, it is still 6% higher.
So, why would you borrow money to contribute to tax-deferred account so that you can pay more tax in the future?
KlangFool
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Re: HELOC to Maximize Retirement Contribution
I suspect it's because it's easier for the OP to borrow money to pay for his kids education than to pay out of pocket. Making it more complicated may help OP able to distance himself from the fact he will be paying a bunch of $$$. Just a guess.KlangFool wrote: ↑Wed Nov 22, 2017 7:17 amShikoku,Shikoku wrote: ↑Wed Nov 22, 2017 12:06 amKlangFool,
Thank you. I thought that I will accumulate wealth if I pay a lower rate for HELOC than the rate of return of my investments. Is this true? Certainly, when future tax rate is incorporated, things get pretty complicated. I have never paid federal tax at a higher rate than 15%. I need to guess how it will be for me in retirement.
<<Our base income is $102K but most of the years we earn an additional $35K.>>
<< I have just checked, this year I will pay $3,800 for federal tax after receiving AOTC and child tax credit.>>
You are paying $3,800 tax with gross income of either 102K or 137K. Your effective tax rate is 3.8% or lower. Why would you want to defer paying tax at this rate? It is unlikely that you will get a lowered rate any other time in your life. Even assuming 10% tax rate at retirement, it is still 6% higher.
So, why would you borrow money to contribute to tax-deferred account so that you can pay more tax in the future?
KlangFool
DA
Re: HELOC to Maximize Retirement Contribution
DA,Devil's Advocate wrote: ↑Wed Nov 22, 2017 7:21 amI suspect it's because it's easier for the OP to borrow money to pay for his kids education than to pay out of pocket. Making it more complicated may help OP able to distance himself from the fact he will be paying a bunch of $$$. Just a guess.KlangFool wrote: ↑Wed Nov 22, 2017 7:17 amShikoku,Shikoku wrote: ↑Wed Nov 22, 2017 12:06 amKlangFool,
Thank you. I thought that I will accumulate wealth if I pay a lower rate for HELOC than the rate of return of my investments. Is this true? Certainly, when future tax rate is incorporated, things get pretty complicated. I have never paid federal tax at a higher rate than 15%. I need to guess how it will be for me in retirement.
<<Our base income is $102K but most of the years we earn an additional $35K.>>
<< I have just checked, this year I will pay $3,800 for federal tax after receiving AOTC and child tax credit.>>
You are paying $3,800 tax with gross income of either 102K or 137K. Your effective tax rate is 3.8% or lower. Why would you want to defer paying tax at this rate? It is unlikely that you will get a lowered rate any other time in your life. Even assuming 10% tax rate at retirement, it is still 6% higher.
So, why would you borrow money to contribute to tax-deferred account so that you can pay more tax in the future?
KlangFool
DA
That does not change the fact that he is deferring paying tax at 3.8% or lower now. Then, he is most likely to pay a lot more tax in the future. It is a lousy deal even if he is not borrowing the money. The fact that he is borrowing make it even worse. He is losing money on the additional tax that he will be paying plus the interest on the HELOC loan.
KlangFool
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Re: HELOC to Maximize Retirement Contribution
I don't disagree Klang. Good analysis as usual.
DA
DA
Re: HELOC to Maximize Retirement Contribution
Whodidntante,whodidntante wrote: ↑Wed Nov 22, 2017 12:20 am I think it's fine so long as you have significant taxable assets to ride through a lengthy loss of income, if that's a possibility you need to prepare for.
That is a very good point. Thank you for your feedback.
"I don't worry too much about pointing fingers at the past. I operate on the theory that every saint has a past, every sinner has a future." -- Warren Buffett
Re: HELOC to Maximize Retirement Contribution
DA,Devil's Advocate wrote: ↑Mon Nov 20, 2017 3:51 am What about funding a 529 if you are able to deduct from state income taxes and immediately pull that money out. In my state that would save one 8%.
I think I should do this. It will save me 4.25% in state tax. So if I put $10K, I will have $425 in state tax saving. It is free money. However, I will pay federal tax on $425. Thank you for the idea.
"I don't worry too much about pointing fingers at the past. I operate on the theory that every saint has a past, every sinner has a future." -- Warren Buffett
Re: HELOC to Maximize Retirement Contribution
KlangFool,KlangFool wrote: ↑Wed Nov 22, 2017 7:17 amShikoku,Shikoku wrote: ↑Wed Nov 22, 2017 12:06 amKlangFool,
Thank you. I thought that I will accumulate wealth if I pay a lower rate for HELOC than the rate of return of my investments. Is this true? Certainly, when future tax rate is incorporated, things get pretty complicated. I have never paid federal tax at a higher rate than 15%. I need to guess how it will be for me in retirement.
<<Our base income is $102K but most of the years we earn an additional $35K.>>
<< I have just checked, this year I will pay $3,800 for federal tax after receiving AOTC and child tax credit.>>
You are paying $3,800 tax with gross income of either 102K or 137K. Your effective tax rate is 3.8% or lower. Why would you want to defer paying tax at this rate? It is unlikely that you will get a lowered rate any other time in your life. Even assuming 10% tax rate at retirement, it is still 6% higher.
So, why would you borrow money to contribute to tax-deferred account so that you can pay more tax in the future?
I appreciate your feedback and am trying to figure out all the tax-related issues. If I understand it correctly, marginal tax rate is more important than how many percent of total income someone pays in taxes. I am in 15% tax rate now. Therefore, if I am in 15% tax rate in retirement, I could not understand how tax could be an issue. It is more complicated than I thought.
"I don't worry too much about pointing fingers at the past. I operate on the theory that every saint has a past, every sinner has a future." -- Warren Buffett
Re: HELOC to Maximize Retirement Contribution
Shikoku,Shikoku wrote: ↑Thu Nov 23, 2017 1:06 pmKlangFool,KlangFool wrote: ↑Wed Nov 22, 2017 7:17 amShikoku,Shikoku wrote: ↑Wed Nov 22, 2017 12:06 amKlangFool,
Thank you. I thought that I will accumulate wealth if I pay a lower rate for HELOC than the rate of return of my investments. Is this true? Certainly, when future tax rate is incorporated, things get pretty complicated. I have never paid federal tax at a higher rate than 15%. I need to guess how it will be for me in retirement.
<<Our base income is $102K but most of the years we earn an additional $35K.>>
<< I have just checked, this year I will pay $3,800 for federal tax after receiving AOTC and child tax credit.>>
You are paying $3,800 tax with gross income of either 102K or 137K. Your effective tax rate is 3.8% or lower. Why would you want to defer paying tax at this rate? It is unlikely that you will get a lowered rate any other time in your life. Even assuming 10% tax rate at retirement, it is still 6% higher.
So, why would you borrow money to contribute to tax-deferred account so that you can pay more tax in the future?
I appreciate your feedback and am trying to figure out all the tax-related issues. If I understand it correctly, marginal tax rate is more important than how many percent of total income someone pays in taxes. I am in 15% tax rate now. Therefore, if I am in 15% tax rate in retirement, I could not understand how tax could be an issue. It is more complicated than I thought.
How could a person paying $3,800 tax with gross income of 102K or 137K be in 15% tax rate? Officially, you are at 15% marginal tax rate. But, due to child tax credit and AOTC, you only pay 3.8% tax or less. So, effectively, you are not at 15% tax rate. If you are paying 3.8% tax, why are you deferring your tax now in order to pay more tax later?
KlangFool
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Re: HELOC to Maximize Retirement Contribution
KlangFool,KlangFool wrote: ↑Thu Nov 23, 2017 1:34 pmShikoku,Shikoku wrote: ↑Thu Nov 23, 2017 1:06 pmKlangFool,KlangFool wrote: ↑Wed Nov 22, 2017 7:17 amShikoku,Shikoku wrote: ↑Wed Nov 22, 2017 12:06 amKlangFool,
Thank you. I thought that I will accumulate wealth if I pay a lower rate for HELOC than the rate of return of my investments. Is this true? Certainly, when future tax rate is incorporated, things get pretty complicated. I have never paid federal tax at a higher rate than 15%. I need to guess how it will be for me in retirement.
<<Our base income is $102K but most of the years we earn an additional $35K.>>
<< I have just checked, this year I will pay $3,800 for federal tax after receiving AOTC and child tax credit.>>
You are paying $3,800 tax with gross income of either 102K or 137K. Your effective tax rate is 3.8% or lower. Why would you want to defer paying tax at this rate? It is unlikely that you will get a lowered rate any other time in your life. Even assuming 10% tax rate at retirement, it is still 6% higher.
So, why would you borrow money to contribute to tax-deferred account so that you can pay more tax in the future?
I appreciate your feedback and am trying to figure out all the tax-related issues. If I understand it correctly, marginal tax rate is more important than how many percent of total income someone pays in taxes. I am in 15% tax rate now. Therefore, if I am in 15% tax rate in retirement, I could not understand how tax could be an issue. It is more complicated than I thought.
How could a person paying $3,800 tax with gross income of 102K or 137K be in 15% tax rate? Officially, you are at 15% marginal tax rate. But, due to child tax credit and AOTC, you only pay 3.8% tax or less. So, effectively, you are not at 15% tax rate. If you are paying 3.8% tax, why are you deferring your tax now in order to pay more tax later?
KlangFool
Thank you. You are correct; it is marginal tax rate. I intended to mean marginal tax rate. So, I am in 15% marginal tax rate now. Therefore, if I am in 15% marginal tax rate in retirement, I could not understand how tax could be an issue. This is certainly an interesting issue, and I need to learn more.
"I don't worry too much about pointing fingers at the past. I operate on the theory that every saint has a past, every sinner has a future." -- Warren Buffett
Re: HELOC to Maximize Retirement Contribution
Shikoku,Shikoku wrote: ↑Thu Nov 23, 2017 2:14 pmKlangFool,KlangFool wrote: ↑Thu Nov 23, 2017 1:34 pmShikoku,Shikoku wrote: ↑Thu Nov 23, 2017 1:06 pmKlangFool,KlangFool wrote: ↑Wed Nov 22, 2017 7:17 amShikoku,Shikoku wrote: ↑Wed Nov 22, 2017 12:06 am
KlangFool,
Thank you. I thought that I will accumulate wealth if I pay a lower rate for HELOC than the rate of return of my investments. Is this true? Certainly, when future tax rate is incorporated, things get pretty complicated. I have never paid federal tax at a higher rate than 15%. I need to guess how it will be for me in retirement.
<<Our base income is $102K but most of the years we earn an additional $35K.>>
<< I have just checked, this year I will pay $3,800 for federal tax after receiving AOTC and child tax credit.>>
You are paying $3,800 tax with gross income of either 102K or 137K. Your effective tax rate is 3.8% or lower. Why would you want to defer paying tax at this rate? It is unlikely that you will get a lowered rate any other time in your life. Even assuming 10% tax rate at retirement, it is still 6% higher.
So, why would you borrow money to contribute to tax-deferred account so that you can pay more tax in the future?
I appreciate your feedback and am trying to figure out all the tax-related issues. If I understand it correctly, marginal tax rate is more important than how many percent of total income someone pays in taxes. I am in 15% tax rate now. Therefore, if I am in 15% tax rate in retirement, I could not understand how tax could be an issue. It is more complicated than I thought.
How could a person paying $3,800 tax with gross income of 102K or 137K be in 15% tax rate? Officially, you are at 15% marginal tax rate. But, due to child tax credit and AOTC, you only pay 3.8% tax or less. So, effectively, you are not at 15% tax rate. If you are paying 3.8% tax, why are you deferring your tax now in order to pay more tax later?
KlangFool
Thank you. You are correct; it is marginal tax rate. I intended to mean marginal tax rate. So, I am in 15% marginal tax rate now. Therefore, if I am in 15% marginal tax rate in retirement, I could not understand how tax could be an issue. This is certainly an interesting issue, and I need to learn more.
You need to do some tax forecast and check out your calculation. If it turns out that you are deferring tax at 3.8% or below even when you are in 15% marginal tax rate now, it does not make sense for you to borrow money from HELOC.
KlangFool
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Re: HELOC to Maximize Retirement Contribution
Sorry but if you need to take out loans for college you can not afford it. Reduce the cost and cash flow it along with saving until college starts.
How much are your kids contributing to their college? Are they working before and during college? They should be filling out college scholarships applications like crazy. Look at less expensive colleges.
How much are your kids contributing to their college? Are they working before and during college? They should be filling out college scholarships applications like crazy. Look at less expensive colleges.
Re: HELOC to Maximize Retirement Contribution
Thank you, KlangFool, for your excellent suggestions.
"I don't worry too much about pointing fingers at the past. I operate on the theory that every saint has a past, every sinner has a future." -- Warren Buffett
Re: HELOC to Maximize Retirement Contribution
Here's a simplified way to think about it: Money goes IN to a tax-deferred account at the marginal rate. It comes OUT at the effective rate.Shikoku wrote: ↑Thu Nov 23, 2017 2:14 pm KlangFool,
Thank you. You are correct; it is marginal tax rate. I intended to mean marginal tax rate. So, I am in 15% marginal tax rate now. Therefore, if I am in 15% marginal tax rate in retirement, I could not understand how tax could be an issue. This is certainly an interesting issue, and I need to learn more.
That said, I agree with KF. I don't understand why you're so anxious to borrow so you can pay taxes later. Especially when you have all these deductions and credits now that you won't have during retirement.
Re: HELOC to Maximize Retirement Contribution
+1Nate79 wrote: ↑Thu Nov 23, 2017 4:11 pm Sorry but if you need to take out loans for college you can not afford it. Reduce the cost and cash flow it along with saving until college starts.
How much are your kids contributing to their college? Are they working before and during college? They should be filling out college scholarships applications like crazy. Look at less expensive colleges.
Re: HELOC to Maximize Retirement Contribution
Nate79,Nate79 wrote: ↑Thu Nov 23, 2017 4:11 pm Sorry but if you need to take out loans for college you can not afford it. Reduce the cost and cash flow it along with saving until college starts.
How much are your kids contributing to their college? Are they working before and during college? They should be filling out college scholarships applications like crazy. Look at less expensive colleges.
We are not asking kids to contribute for their college. Our plan is not to ask them to work during their undergraduate studies. We like them to focus on studies. Hope they do not party!
"I don't worry too much about pointing fingers at the past. I operate on the theory that every saint has a past, every sinner has a future." -- Warren Buffett