How should my Spouse and I handle a $300,000 Settlement?

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Topic Author
smithbt2
Posts: 38
Joined: Fri Oct 05, 2018 8:44 pm

Re: How should my Spouse and I handle a $300,000 Settlement?

Post by smithbt2 » Sun Aug 11, 2019 7:29 pm

Bacchus01 wrote:
Sun Aug 11, 2019 6:45 pm
smithbt2 wrote:
Sun Aug 11, 2019 5:39 pm
Bacchus01 wrote:
Sun Aug 11, 2019 5:33 pm
smithbt2 wrote:
Sun Aug 11, 2019 5:32 pm
Bacchus01 wrote:
Sun Aug 11, 2019 5:28 pm


$7200 in closing costs? Continually making bad choices. Slow down. Get a plan. Then move forward.
Yes. It was actually $8,100 before I questioned the price of what the title company wanted to charge me for closing. I paid $720 for points (3.75% to 3.625%) plus $450 and $350 for the Maryland Mortgage Certificate, which provides a 25% Federal Tax Credit of Mortgage Interest for the life of the loan, capped at $2K. It is worth the added cost. I don't plan on upgrading to a bigger house or moving. Locking in a lower rate was the best choice for me. I will continue to pay $2,050 toward my mortgage and pretend like the payment did not change.
Good lord, what are the rest of the fees? That’s really high.

And that rate isn’t even that great.
What? Mortgage rates are nearing an all-time low right now. 3.625% is excellent for a 30 year mortgage?

I believe these closing costs are pretty standard, or even less than what some may be paying.

Image
That is a historically good rate. It’s not currently competitive especially considering paying points. Again, slow down.

That $7200 you quoted included escrow, which most would not include. I don’t escrow. Escrow is giving someone else a loan for free.

$4200 in closing costs is not bad, but it’s also not ultra competitive. Those bank fees are high.
I initially locked in at 3.625% but then on July 28 loan eligibility requirements with income changed with the Freddie Mac loan I was quoted... making me no longer eligible. Specifically to qualify my income could not exceed 80% of the Median Income, and mine did. The bank was no longer able to honor the 3.625% rate without me paying points. 3.75% is pretty competitive where I am at. My co-worker just refinanced and he had 3.6% but paid a lot more in points. I forget the exact amount but he had 0.4% in points and it was at least $1,700. And, unlike me, he has over 20% equity in his home. This is the realistic, competitive rate for my area.

Also, the MCC fees are not common for most people. Very few have mortgage certificates or even know what they are. In fact I recall TurboTax saying it is rare to have a mortgage certificate when I claimed my credit for 2018.

Is Escrow optional if you have a mortgage? I was told it is mandatory.

Chicago60
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Re: How should my Spouse and I handle a $300,000 Settlement?

Post by Chicago60 » Sun Aug 11, 2019 7:53 pm

dodecahedron wrote:
Sun Aug 11, 2019 1:12 pm
tomd37 wrote:
Sun Aug 11, 2019 11:23 am
One big question comes to mind for which I do not have the answer - Is this settlement amount considered taxable income and can anyone cite an IRS publication reference :?:
This is a very complicated question and the answer depends on details that the OP should not be sharing in a public forum like this one.

There is some IRS guidance here:

https://www.irs.gov/pub/irs-pdf/p4345.pdf

If the proceeds of the settlement are taxable, there is also the related question of whether the attorney´s fees are deductible. Tax Cut and Jobs Act (TCJA) 2017 got rid of many deductions for personal attorney'fees but there are some exceptions. The attorney who handled the case for your wife ought to be able to refer you to a tax professional who can provide knowledgeable and up-to-date advice on this point.

Worst case for some legal settlements is that the entire $300K is taxable and no legal fees are deductible. The best case is that none of the $300K is taxable. There are various intermediate possibilities and many factors involved.

In short, the OP and spouse should be consulting a knowledgeable tax pro ASAP and certainly before spending or investing any of the proceeds in anything less than 100% safe and liquid. Don´t wait until next April 15 to have a potentially big and unpleasant tax bill surprise and no available funds to pay it. And do not rely on tax advice from this or any other public forum in a situation this complicated. The answers depend on details that should not be shared publicly because they could be identifying.
OP, this is the first step you should be doing. You need to know whether none of the proceeds is taxable (this will be determined based on the nature of the case your wife had, for example personal injury) or if all of them are. From that answer--which you can get from a tax lawyer (have a copy of the complaint and settlement agreement) or accountant experienced with the issue--you will know the net proceeds after taxes that you will have available to invest or pay off debts.

Grt2bOutdoors
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Re: How should my Spouse and I handle a $300,000 Settlement?

Post by Grt2bOutdoors » Sun Aug 11, 2019 8:48 pm

smithbt2 wrote:
Sun Aug 11, 2019 11:28 am
Grt2bOutdoors wrote:
Sun Aug 11, 2019 11:21 am
smithbt2 wrote:
Sun Aug 11, 2019 11:06 am
BarbBrooklyn wrote:
Sun Aug 11, 2019 11:04 am
Isn't this your spouse's money?
It is, technically. But it is "our" money. I pay the mortgage and all of the household bills, except for my spouse's auto loan. My spouse also did not work for 2 years, a time during which I paid all bills.
It's your spouse's money. Spouse should pay off her car loan, immediately. Spouse should use what ever money left over to pay for therapy if needed, her therapy. You should take $100-$160 and take a Dave Ramsey course. You are fortunate to be earning that kind of money but you have financially destructive spending habits - large auto loans that total nearly 3/4's of your annual income, you are paying PMI which indicates you bought too much house - you are house poor. If it were not for the windfall (if you want to call it that), you'd be in a bigger hole. Your spouse should immediately fund a spousal ROTH IRA for herself this year.
Not eligible for Roth IRA with high income?

I live in a HCOL area and I bought a townhouse. I evaluated purchasing a Condo. It was more expensive than a townhouse when considering HOA plus Condo Association Fees and Condos have higher interest rates. My mortgage is cheaper than renting a nearby apartment which is 1/4 the size of my townhouse. You do not know the entire situation. I paid for my spouse's therapy - OUT OF POCKET.
Your income is $90k, I believe that falls within the income limit married filing jointly to be able to fund the Roth IRA.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

playtothebeat
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Re: How should my Spouse and I handle a $300,000 Settlement?

Post by playtothebeat » Sun Aug 11, 2019 9:49 pm

I think first and foremost you and your spouse need to be on the same page with respect to finances.
We all suggest paying off the high interest car loan first, but if your spouse doesn’t want to do that, I’m not sure you’ll be able to convince her/him.
Get on the same page with long term goals..

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dodecahedron
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Re: How should my Spouse and I handle a $300,000 Settlement?

Post by dodecahedron » Sun Aug 11, 2019 9:58 pm

Grt2bOutdoors wrote:
Sun Aug 11, 2019 8:48 pm
Your income is $90k, I believe that falls within the income limit married filing jointly to be able to fund the Roth IRA.
At this point, without knowing how much of the $300K is taxable, it is completely premature to reach this conclusion.

Roth AGI eligibility limits are here.

Flora
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Re: How should my Spouse and I handle a $300,000 Settlement?

Post by Flora » Sun Aug 11, 2019 10:03 pm

To be eligible for a full 2019 Roth IRA contribution assuming there is sufficient earned income

MFJ Modified AGI limit: under $193k

MFS (living together) Modified AGI limit: under $10k

https://www.irs.gov/retirement-plans/am ... e-for-2019

Northern Flicker
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Re: How should my Spouse and I handle a $300,000 Settlement?

Post by Northern Flicker » Sun Aug 11, 2019 10:50 pm

Bonds may collapse soon. I do not feel great about our current monetary policies and I would not be surprised to see negative interest rates in our future.
That’s not how bonds work. High credit quality bond values would appreciate significantly if we get negative interest rates in the US. While it could happen, it is not clear which way interest rates will move in the future.

SR II
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Re: How should my Spouse and I handle a $300,000 Settlement?

Post by SR II » Sun Aug 11, 2019 10:51 pm

OP---
I sincerely hope you take my advice. I truly think you are posting in the wrong forum. You don't need financial advice from strangers as much as the two of you need some serious marital counseling. My best to both of you.

crit
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Re: How should my Spouse and I handle a $300,000 Settlement?

Post by crit » Sun Aug 11, 2019 11:37 pm

smithbt2 wrote:
Sun Aug 11, 2019 5:07 pm

I sold the Civic and the old M3. I now have an M4. I only have one car to my name.

She does not have the Tahoe anymore. I stopped paying for it and she let the bank take it, because she could not afford the vehicle and it was worth far less than she owed. She bought a Jeep with an outrageous interest rate after I sold the Honda.
I think the best advice I can give you is to keep your finances separate. Treat the settlement for what it is - your wife's money. She should pay off the 22% loan you forced her into, and start a nest egg of her own.

fyre4ce
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Re: How should my Spouse and I handle a $300,000 Settlement?

Post by fyre4ce » Mon Aug 12, 2019 1:26 am

I disagree with everyone who says the money is her money, they should manage finances separately. The two of you should be partners in every way, including financially. You guys need a written financial plan, and need to stick to it. That plan needs to include you guys saving 20% of your gross income and aggressively paying off debts. I agree with the suggestions that Dave Ramsey's Financial Peace University would be a good investment.

You've shared some anecdotes that suggest your wife is really bad at managing money (cashing out a pension and spending it, etc). I don't mean to be overly dramatic, but if this is not fixed, then it will end up causing either divorce or financial ruin for both of you. I've seen it up close and it's very unfortunate. You should work with her to create a vision of the life you guys really want - financially independent, debt-free, work-optional, able to spend money on things that make you happy, including BMWs. Then figure out the steps to get there, which I guarantee don't include buying luxury cars with borrowed money (esp. at 22%!!) and foregoing saving for retirement. You both need Solo 401k's (you said she gets paid on a 1099 so she could open one it sounds like), although your SEP-IRA is probably OK for now.

Between the two of you, it sounds like you're the more financially savvy than her, so you'll have to lead the charge and get her on-board with each step. You've also made some bad choices too, which you seem to acknowledge, but then insist you're not willing to take corrective action. Honestly, part of your plan should include selling your car. It will eliminate $50k worth of debt against a depreciating asset, and will also be symbolic of your commitment to your family's (wife's and your) financial security. More than anything, the two of you need a change in the attitude you take toward money. I know you say you love driving your car, and ask when can you enjoy life? The answer is- when you can afford it, which for you guys is not now. There are plenty of cheaper hobbies that lots of people enjoy. Get all your debts gone with the exception of your mortgage, get half a million saved for retirement, work on your careers and boost you and your wife's income, and then you can think about spending some frivolous cash. On the path you're on, you'll have decades of financial stress on your marriage, which it may or may not survive, followed by a meager retirement, living on not much more than social security, and possibly calling your kids regularly to ask for money. Break the cycle. The criticism you're getting isn't because we like finding faults in others, it's because many of us have been in your shoes, or have loved ones who have been. We know what it takes to dig your way out. It won't be easy and will involve sacrifices that you're not accustomed to making. But it will be worth it. You'll enjoy driving your car a lot more when you know it's not jeopardizing your financial future.

bikesandbeers
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Re: How should my Spouse and I handle a $300,000 Settlement?

Post by bikesandbeers » Mon Aug 12, 2019 1:33 am

Wow, you been through a lot. If you can't drag your self to regular couples counseling, maybe some sort of couples retreat could be helpful as a reset.

As noted, you need to be clear on the tax implications of the settlement. Might be worth find a fee only financial planner to help get you on the right path, especially if she won't take your advice.

Pay off her car ASAP Keep you current car going for as long as possible if you must keep it. Otherwise there are lots of cheap fun cars out there. Miata,VW GTI, Focus RS etc.
After building up an emergency and don't stress too much about the markets. I started my retirement investing in 2007 and it look very bad before it came roaring back.

ponyboy
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Re: How should my Spouse and I handle a $300,000 Settlement?

Post by ponyboy » Mon Aug 12, 2019 5:59 am

Bacchus01 wrote:
Sun Aug 11, 2019 12:20 pm
Goal33 wrote:
Sun Aug 11, 2019 11:06 am
I don’t know but you’re making big car mistakes. This is coming from somebody who is not your typical anticar Boglehead.

Maybe keep the cars because you already made the mistake but definitely pay off the loans.
If OP can’t fix some of the basic behavior issues, then giving advice on the windfall is probably pointless.
^this. Notice how the wife isnt here asking for advice... Hate to say it, but we all know how this one will end. Others have already provided enough good advice but my guess is it will fall on deaf ears. Good luck to you OP.

spectec
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Re: How should my Spouse and I handle a $300,000 Settlement?

Post by spectec » Mon Aug 12, 2019 6:48 am

If the settlement is taxable, then the attorney fees will probably not be deductible in determining the taxable amount. The confidentiality terms of most settlements do carve out an exception allowing you to discuss the details with your tax advisor. Since you MIGHT be facing a tax bill ranging somewhere between $0 to $60K+, its probably worth a few hundred dollars to get an expert opinion on this.
Last edited by spectec on Mon Aug 12, 2019 7:02 am, edited 1 time in total.
Don't gamble; take all your savings and buy some good stock and hold it till it goes up, then sell it. If it don't go up, don't buy it. - Will Rogers

nura
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Re: How should my Spouse and I handle a $300,000 Settlement?

Post by nura » Mon Aug 12, 2019 6:51 am

Chronic spending problems can't be cured with investment advise

Topic Author
smithbt2
Posts: 38
Joined: Fri Oct 05, 2018 8:44 pm

Re: How should my Spouse and I handle a $300,000 Settlement?

Post by smithbt2 » Mon Aug 12, 2019 7:00 am

nura wrote:
Mon Aug 12, 2019 6:51 am
Chronic spending problems can't be cured with investment advise
I don't need investment advice. I follow the three fund portfolio and I am 80% stocks / 20% bonds.

Topic Author
smithbt2
Posts: 38
Joined: Fri Oct 05, 2018 8:44 pm

Re: How should my Spouse and I handle a $300,000 Settlement?

Post by smithbt2 » Mon Aug 12, 2019 7:02 am

spectec wrote:
Mon Aug 12, 2019 6:48 am
If the settlement is taxable, then the attorney fees will probably not be deductible in determining the taxable amount. The confidentiality terms of most settlements do carve out an exception allowing you to discuss the details with your tax advisor.
I did some research. The lawyer fees are deductible (thankfully). Unfortunately I can't discuss the nature of the case, but take a look at this article and you'll see the reasons in which they can be deducted. https://rroyselaw.com/tax-law/article/n ... -jobs-act/

Topic Author
smithbt2
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Joined: Fri Oct 05, 2018 8:44 pm

Re: How should my Spouse and I handle a $300,000 Settlement?

Post by smithbt2 » Mon Aug 12, 2019 7:04 am

fru-gal wrote:
Mon Aug 12, 2019 6:39 am
JGoneRiding wrote:
Sun Aug 11, 2019 5:31 pm
smithbt2 wrote:
Sun Aug 11, 2019 12:51 pm
Sandtrap wrote:
Sun Aug 11, 2019 12:44 pm
1 pay off both car loans
2 pay off student loan
3 balance in Emergency fund, High yield accounts, CD's, etc.
225,000 - 47591 - 21000-4800 = 151609

less Mortgage payment: 45,900

= 105709 (balance)

Can you open a retirement account for your spouse?

j
Yes. I am going to help her open up a Traditional IRA through Fidelity. I have my accounts with Fidelity. Her employer offers a 401(K) Plan but the fees are outrageous. I actually told her not to contribute until they start matching 5%, which they do after a year of employment.
Because it sounds like the 300k is going to he taxed as ordinary income I would go ahead and max her 401k this year. Its doubtful the fees are 35%

I would also max your sep or whatever you decide . You are going to need to stop your Roth this year and may need to in fact do a backdoor if you want that space.

This needs a long discussion with your spouse possible with a mediator so that she doesn't just try to blow it all
"According to the web" legal settlements of this type are not taxable. Yet the OP said it is being disbursed to them as taxable income...

Trying to reason with the OP in this thread seems like trying to reason with an alcoholic. Dreadful decisions, no ability to see the decisions are wrong.
I understand my car purchase was a poor financial decision. In fact, I understand every car purchase I have made has been a poor financial decision. I do not intend to get rid of the car nor replace this car for years to come. Let's give the car a rest, please?

Topic Author
smithbt2
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Re: How should my Spouse and I handle a $300,000 Settlement?

Post by smithbt2 » Mon Aug 12, 2019 7:13 am

My spouse and I already talked about the settlement (before I came here)! We are paying off the Jeep (the 22% Auto Loan). She wants me to help her setup retirement accounts like I have and maximize the contributions to defer some taxes. Then, she wants the remaining proceeds to go to me.

Some are saying I don't listen or take advice. That is completely unfounded. I have given my reasons for my car purchase and I stand by them. I have the inconvenience of having a roommate to cover my car - which I feel is a great tradeoff. Though my roommate is certainly a pleasure to have here.

I came here with specific questions; few have actually addressed them and those that have, I greatly appreciate it.

DK666
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Re: How should my Spouse and I handle a $300,000 Settlement?

Post by DK666 » Mon Aug 12, 2019 7:27 am

I’ll add some color to why you’re getting the responses you’re getting.

Your current debt load makes you 4x as likely to default on your mortgage then the average borrower and likely 40x as likely as the average poster on this forum.

They fear if you pay off this debt then you will replace it with new debt and restart the cycle.

I recommend you pay off her auto loan and save everything else and don’t touch it until retirement. I would not pay off the sports car with the settlement, to understand my logic pretend the settlement money came before the sports car purchase.

Many people live their lives by borrowing as much as they can and filling paid off debt with new debt. Regardless of whether you want to live like that, I would save and invest the balance of the settlement and you’ll be in good shape long term even if you don’t change your habits.

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oldcomputerguy
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Re: How should my Spouse and I handle a $300,000 Settlement?

Post by oldcomputerguy » Mon Aug 12, 2019 7:42 am

A couple of snarky posts were removed. This topic has run its course and is locked (topic exhausted). See Locked Topics:
Occasionally, even if there are no overt violations of posting policy, a topic (or thread) will reach a point where the information content of the discussion has been essentially exhausted and further replies are much more likely to cause distress to the community than add anything of value.
"I’ve come around to this: If you’re dumb, surround yourself with smart people; and if you’re smart, surround yourself with smart people who disagree with you." (Aaron Sorkin)

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