Investment Ideas

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
mary1492
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Re: Investment Ideas

Post by mary1492 » Sat Nov 16, 2019 2:32 pm

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Last edited by mary1492 on Wed Dec 04, 2019 10:03 pm, edited 1 time in total.

tibbitts
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Re: Investment Ideas

Post by tibbitts » Sat Nov 16, 2019 2:50 pm

juvenho wrote:
Mon Nov 11, 2019 12:22 pm
I told the plan to my friend.

He felt powered by knowing that a lot of Bogleheads approved it and it is really good opportunity he had to take that cash out money and use it for his benefits.

He asked me to thank everyone.

Please post any comments and I would appreciate that
All the Bogleheads like me who think this is a breathtakingly stupid idea stopped posting halfway down the thread.

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Brianmcg321
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Re: Investment Ideas

Post by Brianmcg321 » Sat Nov 16, 2019 3:56 pm

juvenho wrote:
Wed Nov 13, 2019 7:43 pm
Just keeping you posted.

My friend did appreciate all your comments very much. I showed him all discussions here.

He just asked me to ask for final Bogleheads approval to start his plan right away.

Please give any final advise about current situation or changes if necessary.

Thanks
This is a terrible idea. Taking risk in your home like this is just stupid.
Please let your friend know that you must be ignoring all of the negative feedback for you to think there is any kind of approval.
Rules to investing: | 1. Don't lose money. | 2. Don't forget rule number 1.

KingRiggs
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Location: Indiana

Re: Investment Ideas

Post by KingRiggs » Sat Nov 16, 2019 7:35 pm

Two thumbs down.

If I had more thumbs, they would be down as well.

I hope your “friend” actually reads and understands ALL the replies to your post.
Advice = noun | Advise = verb | | Roth, not ROTH

themuse
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Re: Investment Ideas

Post by themuse » Sat Nov 16, 2019 8:34 pm

I vote this as a bad idea. So many bad assumptions built in. Please don't say Bogleheads approved...totally against the BH philosophy.
--themuse-- | | Investing should be boring

Ostentatious
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Re: Investment Ideas

Post by Ostentatious » Sat Nov 16, 2019 8:37 pm

Very bad idea to cash out refinance to invest in the stock market or in a 401K without any guaranteed returns. The stock market could crash on Monday and the money would be wiped out like that. That is partially why it is important to also have some good equity in your house and not put everything in one basket. At this point, your friend would have all his "investments" in one basket (the stock market). The harm has been done already and I see that you're very defensive about what your friend did. Regardless of how you look at it, it is a very bad move. I would advise your friend to put the money back in the mortgage and take the little hit there. It is more guaranteed. I would not ask him to do the same thing if he had gotten a gift of a $100,000 or an inheritance. In my humble opinion, it would have been better for him to have a paid off the home in 17 years, rather than in 30 years. With a paid off house in 17 years or less, if he is aggressive in paying down his mortgage with a lower rate due to a refinance, he would likely be way more ahead. At this point, I would only wish him a very good luck in his investment of $100,000 for any meaningful returns on that in 17 years. While still owing the bank for a good 30 years. How getting in debt in order to invest makes sense to you beats my mind.

vipertom1970
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Re: Investment Ideas

Post by vipertom1970 » Sat Nov 16, 2019 8:43 pm

Ostentatious wrote:
Sat Nov 16, 2019 8:37 pm
Very bad idea to cash out refinance to invest in the stock market or in a 401K without any guaranteed returns. The stock market could crash on Monday and the money would be wiped out like that. That is partially why it is important to also have some good equity in your house and not put everything in one basket. At this point, your friend would have all his "investments" in one basket (the stock market). The harm has been done already and I see that you're very defensive about what your friend did. Regardless of how you look at it, it is a very bad move. I would advise your friend to put the money back in the mortgage and take the little hit there. It is more guaranteed. I would not ask him to do the same thing if he had gotten a gift of a $100,000 or an inheritance. In my humble opinion, it would have been better for him to have a paid off the home in 17 years, rather than in 30 years. With a paid off house in 17 years or less, if he is aggressive in paying down his mortgage with a lower rate due to a refinance, he would likely be way more ahead. At this point, I would only wish him a very good luck in his investment of $100,000 for any meaningful returns on that in 17 years. While still owing the bank for a good 30 years. How getting in debt in order to invest makes sense to you beats my mind.
+1, not very good move !

Topic Author
juvenho
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Re: Investment Ideas

Post by juvenho » Tue Nov 19, 2019 6:13 pm

Brianmcg321 wrote:
Sat Nov 16, 2019 3:56 pm
juvenho wrote:
Wed Nov 13, 2019 7:43 pm
Just keeping you posted.

My friend did appreciate all your comments very much. I showed him all discussions here.

He just asked me to ask for final Bogleheads approval to start his plan right away.

Please give any final advise about current situation or changes if necessary.

Thanks
This is a terrible idea. Taking risk in your home like this is just stupid.
Please let your friend know that you must be ignoring all of the negative feedback for you to think there is any kind of approval.
Dear Brianmcg321

We never ignored ideas came out from Bogleheads. As you can see the move has been approved by many of them. Also as you can read from the beginning he never risked his home (yes it is stupid if someone does). He never raised his mortgage payment. If he can’t pay his mortgage he would have lose his home anyways without that $100,000 cash out. So it didn’t make any difference for him regarding Dangering his home. And by putting that money on his 401k it would give him great tax benefits. Thanks for your comments

Topic Author
juvenho
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Re: Investment Ideas

Post by juvenho » Tue Nov 19, 2019 6:20 pm

mary1492 wrote:
Sat Nov 16, 2019 2:32 pm
juvenho wrote:
Wed Nov 13, 2019 7:43 pm
He just asked me to ask for final Bogleheads approval to start his plan right away.
As if "final Bogleheads approval" means something? He won't do it otherwise? The comments already here aren't enough? And how exactly will "final Bogleheads approval" be determined? The majority of folks responding yet again?

You won't accept any view which does not agree with your own, as evidenced in the comments, so I don't see the purpose in this exercise.

No, I do not approve. This is nothing more than a maneuver to leverage the equity in one's home as a piggy bank, to use for some other purpose. You want to buy some other investment? Well, then you are using your home as a margin loan. The entire thing can backfire in a big way ... real estate market could crumble, 401k (or wherever else friend puts the money) can also crumble, your friend could lose his job. When a recession hits, it is not unusual for all of these to happen simultaneously. Your contention has been "the monthly payments on the mortgage are about the same". However, the mortgage now has an additional $100k added to it. If for some unexpected reason your friend is forced to sell the home, and the real estate market is down, he may be underwater by a lot. Your friend puts the money into 401k, then it's very likely not coming out before age 59 1/2 without taxes and penalty.

Leverage is leverage. Maybe it will work out, maybe not. There's risk.

Dear MARY1492

Thanks for your comment.
I don’t know why you are so negative and against many Bogleheads opinions who consider this pretty good move. Everything is risky and can crash. From your point of view if the market crashes and everything goes down, he would lose his home. Once again in if is not able to make his monthly payment he would lose his home anyways, but he kept the same payment and no danger at this point. On the other hand he would be able to lessen his taxes and get way more laverage.

Topic Author
juvenho
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Re: Investment Ideas

Post by juvenho » Tue Nov 19, 2019 6:22 pm

KingRiggs wrote:
Sat Nov 16, 2019 7:35 pm
Two thumbs down.

If I had more thumbs, they would be down as well.

I hope your “friend” actually reads and understands ALL the replies to your post.
Dear KingRiggs

Yes he did read and u understood. And he is thankful for all support and advises.

Topic Author
juvenho
Posts: 59
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Re: Investment Ideas

Post by juvenho » Tue Nov 19, 2019 6:33 pm

Ostentatious wrote:
Sat Nov 16, 2019 8:37 pm
Very bad idea to cash out refinance to invest in the stock market or in a 401K without any guaranteed returns. The stock market could crash on Monday and the money would be wiped out like that. That is partially why it is important to also have some good equity in your house and not put everything in one basket. At this point, your friend would have all his "investments" in one basket (the stock market). The harm has been done already and I see that you're very defensive about what your friend did. Regardless of how you look at it, it is a very bad move. I would advise your friend to put the money back in the mortgage and take the little hit there. It is more guaranteed. I would not ask him to do the same thing if he had gotten a gift of a $100,000 or an inheritance. In my humble opinion, it would have been better for him to have a paid off the home in 17 years, rather than in 30 years. With a paid off house in 17 years or less, if he is aggressive in paying down his mortgage with a lower rate due to a refinance, he would likely be way more ahead. At this point, I would only wish him a very good luck in his investment of $100,000 for any meaningful returns on that in 17 years. While still owing the bank for a good 30 years. How getting in debt in order to invest makes sense to you beats my mind.
Dear ostentatious

Please be advised that first of all he is not going to put everything on stock market. He is doing pretty balanced portfolio with the mix of different asset classes. Now let me explain all your concerns: you are talking about good home equity and market crash. Please tell me what it the house market crashes and the home price goes down. Would there be any equity? Of Course no, the equity would be on his hand.
Yes there is some risk on everything but as you could read from previous comments by putting that amount on his and wife’s 401k-s (max it out) would get him greAt tax benefits (appx. $4500 saving a year).
And again just pay attention that this is not gonna effect his lifestyle. He has stable job and gonna pay the same mortgage every month.
I am just amazed that some Bogleheads don’t consider this great move. Please, please read the entire discussions to see how many people positively commented for this idea and also look at my calculations numbers. Thanks

KingRiggs
Posts: 328
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Location: Indiana

Re: Investment Ideas

Post by KingRiggs » Tue Nov 19, 2019 6:35 pm

The Steve Jobs Reality Distortion Field lives on... :oops:
Advice = noun | Advise = verb | | Roth, not ROTH

mary1492
Posts: 60
Joined: Thu Oct 17, 2019 3:02 am

Re: Investment Ideas

Post by mary1492 » Tue Nov 19, 2019 6:46 pm

.....
Last edited by mary1492 on Wed Dec 04, 2019 10:04 pm, edited 1 time in total.

Topic Author
juvenho
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Re: Investment Ideas

Post by juvenho » Tue Nov 19, 2019 7:45 pm

mary1492 wrote:
Tue Nov 19, 2019 6:46 pm
juvenho wrote:
Tue Nov 19, 2019 6:20 pm
mary1492 wrote:
Sat Nov 16, 2019 2:32 pm
juvenho wrote:
Wed Nov 13, 2019 7:43 pm
He just asked me to ask for final Bogleheads approval to start his plan right away.
As if "final Bogleheads approval" means something? He won't do it otherwise? The comments already here aren't enough? And how exactly will "final Bogleheads approval" be determined? The majority of folks responding yet again?

You won't accept any view which does not agree with your own, as evidenced in the comments, so I don't see the purpose in this exercise.

No, I do not approve. This is nothing more than a maneuver to leverage the equity in one's home as a piggy bank, to use for some other purpose. You want to buy some other investment? Well, then you are using your home as a margin loan. The entire thing can backfire in a big way ... real estate market could crumble, 401k (or wherever else friend puts the money) can also crumble, your friend could lose his job. When a recession hits, it is not unusual for all of these to happen simultaneously. Your contention has been "the monthly payments on the mortgage are about the same". However, the mortgage now has an additional $100k added to it. If for some unexpected reason your friend is forced to sell the home, and the real estate market is down, he may be underwater by a lot. Your friend puts the money into 401k, then it's very likely not coming out before age 59 1/2 without taxes and penalty.

Leverage is leverage. Maybe it will work out, maybe not. There's risk.

Dear MARY1492

Thanks for your comment.
I don’t know why you are so negative and against many Bogleheads opinions who consider this pretty good move. Everything is risky and can crash. From your point of view if the market crashes and everything goes down, he would lose his home. Once again in if is not able to make his monthly payment he would lose his home anyways, but he kept the same payment and no danger at this point. On the other hand he would be able to lessen his taxes and get way more laverage.
Dear juvenho,
*MOST* Bogleheads on this thread think this is a terrible move.

*NOBODY* has given "final approval".

Please look at my comprehensive conclusion posted on November 8. As you would see I broke all facts down by point to point and mentioned all benefits of this decision.
Once again nothing is 100% and nothing is guaranteed but if you use your opportunities wisely you can get great benefits. Thank you.

GrowthSeeker
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Re: Investment Ideas

Post by GrowthSeeker » Tue Nov 19, 2019 8:13 pm

juvenho wrote:
Wed Nov 06, 2019 6:34 pm
The only change in his life that he has $100,000 as a result of 3.5% refinancing and making his loan from $210,000 to $310,000. Of course the cons here is that his loan got extended from 17 years to 30 years. But please keep in mind that not all debts are bad, debt can be very good thing as week if you control it wisely.
While there may be some debts that are not bad, what your friend did is not one of them. He basically borrowed $100k, is earning 2% (minus 22% of that in income tax) on it in a money market but paying 3.5% interest and . If he were using the 100k to pay down high interest credit card debt, that would be one example of a good use of this loan. Maxing out tax advantaged contributions, as has been mentioned above, is maybe the best idea given that this refi has already happened. To my 'old guy' brain, getting out of debt should be project Number One, except in unusual circumstances. Or if the mortgage interest was low AND tax deductible AND the tax bracket were high to take full advantage of this AND the money was going into something with a very good chance of growing faster than the tax-adjusted mortgage rate: then sure, such leverage would make sense.

When I read between the lines, I suspect that what we haven't been told is that expenses are barely covered by income, or that your friend is even deficit spending. And the idea of an extra 100k in the bank was attractive either because they have no emergency fund, or they want to feel like they are participating in investments (keeping up with the investment Joneses); or just that this way was a lot easier and more fun than cutting back on expenses. I'm just guessing here; I could certainly be wrong.

But in my view, this loan was very foolish. And I did read all of the OP's numbers.

And I agree totally with comments I have clipped from the posters below and several others I did not quote from:
mary1492 wrote:
Sat Nov 16, 2019 2:32 pm
You won't accept any view which does not agree with your own, as evidenced in the comments, so I don't see the purpose in this exercise.

No, I do not approve. This is nothing more than a maneuver to leverage the equity in one's home as a piggy bank, to use for some other purpose. ... ...
<snip>
Leverage is leverage. Maybe it will work out, maybe not. There's risk.
tibbitts wrote:
Sat Nov 16, 2019 2:50 pm
All the Bogleheads like me who think this is a breathtakingly stupid idea stopped posting halfway down the thread.
Brianmcg321 wrote:
Sat Nov 16, 2019 3:56 pm
This is a terrible idea. Taking risk in your home like this is just stupid.
Please let your friend know that you must be ignoring all of the negative feedback for you to think there is any kind of approval.
Just because you're paranoid doesn't mean they're NOT out to get you.

DesertDiva
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Location: In the desert

Re: Investment Ideas

Post by DesertDiva » Tue Nov 19, 2019 10:35 pm

I couldn’t help but think of this bizarre thread when I saw this MW article today:

https://www.marketwatch.com/story/this- ... al-finance

ARoseByAnyOtherName
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Re: Investment Ideas

Post by ARoseByAnyOtherName » Tue Nov 19, 2019 10:44 pm

I'm pretty sure this person is just trolling everyone. Kind of surprised the thread hasn't been locked yet.

DesertDiva
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Location: In the desert

Re: Investment Ideas

Post by DesertDiva » Tue Nov 19, 2019 10:53 pm

ARoseByAnyOtherName wrote:
Tue Nov 19, 2019 10:44 pm
I'm pretty sure this person is just trolling everyone. Kind of surprised the thread hasn't been locked yet.
Agreed!

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sergeant
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Re: Investment Ideas

Post by sergeant » Wed Nov 20, 2019 12:25 am

+1 on horrible idea.
Lincoln 3 EOW! AA 40/60.

Topic Author
juvenho
Posts: 59
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Re: Investment Ideas

Post by juvenho » Wed Nov 20, 2019 8:56 am

Dear Bogleheads once again thank you for your comments. This is open discussion and some people are just passing treshold and using offensive words. I don’t wanna go into that level, Please don’t do that. My friend is not stupid, rather he is very hard working and smart person.
Once again I am breaking down all benefits of $100,000 cash out:
- by maxing out his and wife’s 401k he is putting extra $20,000 each year. That is saving about $5000 a year. Here is how. That $20,000 would bring his taxable income to around $78,000 and that would put them on 12% tax bracket vs 22%.
- the money will last 5 years, but in that 5 years he would earn about $25,000 tax saving, plus over $5000 interest from money market fund (he is gonna put that $100,000 in that fund)
- in 5 years $100,000 would be transferred to their 401k account and will be allocated in diversified portfolio. D that 5 years he and wifewould get salary increases and every time they would increase their payroll contributions a little bit (which will allow that $100,000 last even longer) with the goal of trying to have maximum contribution even after $100,000 run out.
- this simple steps would already give him about 30% return over 5 years and he would get his $30,000 back just from tax saving and money market interest.
Please keep in mind again that he doesn’t risk his house and keeping the Same lifestyle and same payment.

How some people in this world can say this is a bad idea?

pkcrafter
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Re: Investment Ideas

Post by pkcrafter » Wed Nov 20, 2019 10:17 am

juvenho wrote:
Sun Nov 10, 2019 3:59 pm
That is what I told him to do. To put that money on Money Market Account and start pouring slowly from there. And yes it would take about 4 years for his and his wife. Meanwhile he would get some percentage yield from money market account and he would decrease their annual taxable account, which would save them a lot of money.
I advised him to diversify and get balanced and low risk portfolio. He is gonna do the following within his 401k
- 20% US large cap fund
- 5% US mid cap fund
- 5% US small cap fund
- 10% non-US equity fund
-20% Inflation protection fund
- 40% Bond fund

This is very good diversification and has a lot of caution in any situation.
60/40 seems to be a good allocation for your friend. Your friend appears to know very little about investing, so I'm hesitant on the above recommendation of using small amounts of mid cap and small cap. Also, I might have missed it, but you have not listed his fund options and expense ratios.

There is no doubt that his best investing option is to move the 100k into long term investments as fast as he can because that will provide the best return over his investing timeline. That means maxing the company plans plus individual IRAs for each. Get the cash working for them ASAP.

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

Topic Author
juvenho
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Re: Investment Ideas

Post by juvenho » Wed Nov 20, 2019 10:27 am

pkcrafter wrote:
Wed Nov 20, 2019 10:17 am
juvenho wrote:
Sun Nov 10, 2019 3:59 pm
That is what I told him to do. To put that money on Money Market Account and start pouring slowly from there. And yes it would take about 4 years for his and his wife. Meanwhile he would get some percentage yield from money market account and he would decrease their annual taxable account, which would save them a lot of money.
I advised him to diversify and get balanced and low risk portfolio. He is gonna do the following within his 401k
- 20% US large cap fund
- 5% US mid cap fund
- 5% US small cap fund
- 10% non-US equity fund
-20% Inflation protection fund
- 40% Bond fund

This is very good diversification and has a lot of caution in any situation.
60/40 seems to be a good allocation for your friend. Your friend appears to know very little about investing, so I'm hesitant on the above recommendation of using small amounts of mid cap and small cap. Also, I might have missed it, but you have not listed his fund options and expense ratios.

There is no doubt that his best investing option is to move the 100k into long term investments as fast as he can because that will provide the best return over his investing timeline. That means maxing the company plans plus individual IRAs for each. Get the cash working for them ASAP.

Paul
Thanks Paul

Besides above options he also has target funds and balanced funds. The expense ratio is very low and this allocation seems pretty solid. Do you have other recommendation?

Chip Shot
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Re: Investment Ideas

Post by Chip Shot » Wed Nov 20, 2019 11:02 am

In my opinion, it was a bad move. Might work out, might not. Not a risk that I would take
Last edited by Chip Shot on Wed Nov 20, 2019 12:03 pm, edited 1 time in total.

snailderby
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Re: Investment Ideas

Post by snailderby » Wed Nov 20, 2019 11:06 am

No comment on the merits of the cash-refinance. But why would it take 4 years to move $100,000 into you and your wife's tax-advantaged accounts? The contribution limits for 2020 are $19,500 for each spouse's 401(k) and another $6000 for each spouse's IRA. That's a total of $51,000 per year. If you are eligible to contribute to an HSA, that's potentially another $7,100 per year of tax-advantaged space. Do you have certain reasons to prefer investing in these tax-advantaged accounts later rather than maxing them out now?

muffins14
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Re: Investment Ideas

Post by muffins14 » Wed Nov 20, 2019 11:53 am

Clearly you just want to do this, regardless of feedback on leverage and confusion over why you’d prefer to make 13 extra years of payments.

So, just max out both 401ks and IRAs (Roth backdoor if that’s beneficial) and be done with it ASAP. It doesn’t matter that at some point you’ll “run out” of this money, as the whole point is to have it invested as efficiently as possible anyway.

flaccidsteele
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Re: Investment Ideas

Post by flaccidsteele » Wed Nov 20, 2019 12:32 pm

juvenho wrote:
Wed Nov 06, 2019 4:22 pm
Thanks for your respond. Wouldn’t you be happy to get good refinancing rate and have worth of $100,000 home equity on your hand?
Yes if you have a plan for it. If not, then no
juvenho wrote:
Wed Nov 06, 2019 4:22 pm
He doesn’t wanna put that money all in stock market and expose himself to the high risk. That was opportunity for him to get lump sum on the hand with no effect on his monthly mortgage payment. Then he wants to consider different options how can he use that money to get the highest benefits.
Difficult to say without knowing what this person is good at

Topic Author
juvenho
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Re: Investment Ideas

Post by juvenho » Wed Nov 20, 2019 12:50 pm

snailderby wrote:
Wed Nov 20, 2019 11:06 am
No comment on the merits of the cash-refinance. But why would it take 4 years to move $100,000 into you and your wife's tax-advantaged accounts? The contribution limits for 2020 are $19,500 for each spouse's 401(k) and another $6000 for each spouse's IRA. That's a total of $51,000 per year. If you are eligible to contribute to an HSA, that's potentially another $7,100 per year of tax-advantaged space. Do you have certain reasons to prefer investing in these tax-advantaged accounts later rather than maxing them out now?
Dear snailderby

What you are saying makes sense. But the reason my friend want to extend it through years is to get tax advantage as many years as possible by decreasing taxable amount.

lakpr
Posts: 3108
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Re: Investment Ideas

Post by lakpr » Wed Nov 20, 2019 1:46 pm

juvenho wrote:
Wed Nov 20, 2019 12:50 pm
What you are saying makes sense. But the reason my friend want to extend it through years is to get tax advantage as many years as possible by decreasing taxable amount.
Given the TCJA's capping of state and local taxes to $10k, the mortgage interest he's paying is NOT tax deductible. At least, not the first $14,400 of the mortgage interest, and raising gradually { SALT cap is not indexed for inflation }

At 2.875% interest rate, to pay a $14,400 interest annually, the mortgage size must be $500k at least. Even then, you get a tax deduction only on that portion of the mortgage that's above $500k.

Edited to add: I think I commented much earlier in this thread, that if you are doing a cash-out refi, the portion of interest applicable to the "cash out" portion is also not tax deductible. Only the original "home acquisition debt" is tax deductible.

Topic Author
juvenho
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Re: Investment Ideas

Post by juvenho » Wed Nov 20, 2019 3:26 pm

lakpr wrote:
Wed Nov 20, 2019 1:46 pm
juvenho wrote:
Wed Nov 20, 2019 12:50 pm
What you are saying makes sense. But the reason my friend want to extend it through years is to get tax advantage as many years as possible by decreasing taxable amount.
Given the TCJA's capping of state and local taxes to $10k, the mortgage interest he's paying is NOT tax deductible. At least, not the first $14,400 of the mortgage interest, and raising gradually { SALT cap is not indexed for inflation }

At 2.875% interest rate, to pay a $14,400 interest annually, the mortgage size must be $500k at least. Even then, you get a tax deduction only on that portion of the mortgage that's above $500k.

Edited to add: I think I commented much earlier in this thread, that if you are doing a cash-out refi, the portion of interest applicable to the "cash out" portion is also not tax deductible. Only the original "home acquisition debt" is tax deductible.
Dear lakpr.

Yes he know that it is not tax deductible. The tax saving I was talking is about getting total income decrease by using cash out money. Meaning he would max out his and wife’s 401k’s and would use that $100,000 to cover his lifestyle expenses.

Topic Author
juvenho
Posts: 59
Joined: Wed Oct 30, 2019 5:39 pm

Re: Investment Ideas

Post by juvenho » Wed Nov 20, 2019 3:26 pm

lakpr wrote:
Wed Nov 20, 2019 1:46 pm
juvenho wrote:
Wed Nov 20, 2019 12:50 pm
What you are saying makes sense. But the reason my friend want to extend it through years is to get tax advantage as many years as possible by decreasing taxable amount.
Given the TCJA's capping of state and local taxes to $10k, the mortgage interest he's paying is NOT tax deductible. At least, not the first $14,400 of the mortgage interest, and raising gradually { SALT cap is not indexed for inflation }

At 2.875% interest rate, to pay a $14,400 interest annually, the mortgage size must be $500k at least. Even then, you get a tax deduction only on that portion of the mortgage that's above $500k.

Edited to add: I think I commented much earlier in this thread, that if you are doing a cash-out refi, the portion of interest applicable to the "cash out" portion is also not tax deductible. Only the original "home acquisition debt" is tax deductible.

GrowthSeeker
Posts: 725
Joined: Tue May 15, 2018 10:14 pm

Re: Investment Ideas

Post by GrowthSeeker » Wed Nov 20, 2019 3:43 pm

Hold on a sec. How is this getting his taxable income down to $78,000?
Earlier OP said their income was $150,000. Subtract off the standard deduction for MFJ, which is $24,800 and you get $125,200. Subtract off $20k of additional 401k contributions and you get $105,200 which is still in the 22% tax bracket and is way more than $78,000. What did I miss?

I'm estimating a one time cost of about $4,000 from borrowing $100k at 3.5% and then earning 1.9% (2% minus income tax), so losing 1.6% of 100k initially, then tapering to zero at 5 years. OK, not a huge deal.

What also doesn't make sense is the friend not wanting the risk of putting money in stocks, but not caring about the risk of going into more debt.

Also keep in mind that tax deferred accounts such as IRAs and 401k are not really 100% yours because someday, when the principal in earnings come out, they get taxed as regular income. To the government kind of owns maybe 10% to 30% of your 401k.
Just because you're paranoid doesn't mean they're NOT out to get you.

Topic Author
juvenho
Posts: 59
Joined: Wed Oct 30, 2019 5:39 pm

Re: Investment Ideas

Post by juvenho » Wed Nov 20, 2019 4:03 pm

GrowthSeeker wrote:
Wed Nov 20, 2019 3:43 pm
Hold on a sec. How is this getting his taxable income down to $78,000?
Earlier OP said their income was $150,000. Subtract off the standard deduction for MFJ, which is $24,800 and you get $125,200. Subtract off $20k of additional 401k contributions and you get $105,200 which is still in the 22% tax bracket and is way more than $78,000. What did I miss?

I'm estimating a one time cost of about $4,000 from borrowing $100k at 3.5% and then earning 1.9% (2% minus income tax), so losing 1.6% of 100k initially, then tapering to zero at 5 years. OK, not a huge deal.

What also doesn't make sense is the friend not wanting the risk of putting money in stocks, but not caring about the risk of going into more debt.

Also keep in mind that tax deferred accounts such as IRAs and 401k are not really 100% yours because someday, when the principal in earnings come out, they get taxed as regular income. To the government kind of owns maybe 10% to 30% of your 401k.
Thanks for your respond.

Yes you missed the part that he is also gonna max out his wife’s 401k and that would bring another $20,000 income decrease and it would come close to $78,000 putting them into 12% bracket. Doesn’t this seem big deal for you? He would save over $4000 a year.
He does care about debt and that is the reason he never put himself in situation that he wouldn’t be able to pay it off. He considers all risks and even in worst scenarios he know that his mortgage payment is not up what he used to pay and he can continue paying.
He knows he should pay taxes one day and it is obvious truth that tax deferred investments are still very good options

WildCat48
Posts: 30
Joined: Sun Jul 16, 2017 8:28 pm

Re: Investment Ideas

Post by WildCat48 » Wed Nov 20, 2019 4:22 pm

This is hands down the thread of the year. :oops:

Topic Author
juvenho
Posts: 59
Joined: Wed Oct 30, 2019 5:39 pm

Re: Investment Ideas

Post by juvenho » Fri Nov 22, 2019 10:31 am

WildCat48 wrote:
Wed Nov 20, 2019 4:22 pm
This is hands down the thread of the year. :oops:
Dear Wildcat48

Thanks to my friend’s situation this thread has been opened up and I am sure it would help a lot of people in the same situation.
Yes there were many comments with positive and negative opinions, but overall this is very good lesson and hope people would take that lesson and would use for their well being.

TN_Boy
Posts: 1278
Joined: Sat Jan 17, 2009 12:51 pm

Re: Investment Ideas

Post by TN_Boy » Fri Nov 22, 2019 11:47 am

juvenho wrote:
Wed Nov 20, 2019 4:03 pm
GrowthSeeker wrote:
Wed Nov 20, 2019 3:43 pm
Hold on a sec. How is this getting his taxable income down to $78,000?
Earlier OP said their income was $150,000. Subtract off the standard deduction for MFJ, which is $24,800 and you get $125,200. Subtract off $20k of additional 401k contributions and you get $105,200 which is still in the 22% tax bracket and is way more than $78,000. What did I miss?

I'm estimating a one time cost of about $4,000 from borrowing $100k at 3.5% and then earning 1.9% (2% minus income tax), so losing 1.6% of 100k initially, then tapering to zero at 5 years. OK, not a huge deal.

What also doesn't make sense is the friend not wanting the risk of putting money in stocks, but not caring about the risk of going into more debt.

Also keep in mind that tax deferred accounts such as IRAs and 401k are not really 100% yours because someday, when the principal in earnings come out, they get taxed as regular income. To the government kind of owns maybe 10% to 30% of your 401k.
Thanks for your respond.

Yes you missed the part that he is also gonna max out his wife’s 401k and that would bring another $20,000 income decrease and it would come close to $78,000 putting them into 12% bracket. Doesn’t this seem big deal for you? He would save over $4000 a year.
He does care about debt and that is the reason he never put himself in situation that he wouldn’t be able to pay it off. He considers all risks and even in worst scenarios he know that his mortgage payment is not up what he used to pay and he can continue paying.
He knows he should pay taxes one day and it is obvious truth that tax deferred investments are still very good options
Are they putting 0 in a 401k now? Are you counting the tax savings of putting 40k in per year? Or the difference between what they put in now versus 40k? And of course, that will last for 3 years (40k, 40k, 20k) then they are back to whatever they are doing now.

Topic Author
juvenho
Posts: 59
Joined: Wed Oct 30, 2019 5:39 pm

Re: Investment Ideas

Post by juvenho » Fri Nov 22, 2019 4:44 pm

He is counting the difference between the amount they put and money they gonna use from $100,000. With maxing out both 401k’s their taxable income would to close to 12% bracket (even if the amount is more the the bracket’s boarder line amount, they would still pay 22% of little portion).

WildCat48
Posts: 30
Joined: Sun Jul 16, 2017 8:28 pm

Re: Investment Ideas

Post by WildCat48 » Tue Dec 03, 2019 9:02 pm

juvenho wrote:
Fri Nov 22, 2019 10:31 am
WildCat48 wrote:
Wed Nov 20, 2019 4:22 pm
This is hands down the thread of the year. :oops:
Dear Wildcat48

Thanks to my friend’s situation this thread has been opened up and I am sure it would help a lot of people in the same situation.
Yes there were many comments with positive and negative opinions, but overall this is very good lesson and hope people would take that lesson and would use for their well being.
Your friend is sure lucky to know you.

Ocean77
Posts: 60
Joined: Wed Oct 23, 2019 3:20 pm

Re: Investment Ideas

Post by Ocean77 » Tue Dec 03, 2019 9:21 pm

The refinance is done, so let's forget how we got here and see what makes sense going forward. If I were in this position, here is what I would do:

1. Cut my budget (live more frugally), and put the max into the 401k. Since this may be difficult to do "cold turkey", I might increase the 401k contribution by a few percentage points each year, until I get to the max. That gradual increase may even out with my yearly salary increases, so it may in the end be barely noticeable.

2. I'd take the $100k and pay down the principal of the mortgage balance. My monthly payment would stay the same, but the mortgage would be paid off in 17 years instead of 30.

With 1) and 2) taken together, I'd have a lot of benefits:
- less taxes (due to higher 401k contributions)
- much less interest paid to the bank for the mortgage
- risk free return on the $100k
- building up a nice nest egg for retirement
- owning the home free and clear much sooner

nydoc
Posts: 52
Joined: Mon Jul 22, 2019 5:57 pm

Re: Investment Ideas

Post by nydoc » Tue Dec 03, 2019 9:25 pm

On behalf of this bogleheads community, I grant final approval to your plan. Now you and your friend should not have any remaining concerns and should feel very smart with the move. Therefore, the discussion is deemed closed from now on.

User avatar
Brianmcg321
Posts: 368
Joined: Mon Jul 15, 2019 8:23 am

Re: Investment Ideas

Post by Brianmcg321 » Tue Dec 03, 2019 9:37 pm

nydoc wrote:
Tue Dec 03, 2019 9:25 pm
On behalf of this bogleheads community, I grant final approval to your plan. Now you and your friend should not have any remaining concerns and should feel very smart with the move. Therefore, the discussion is deemed closed from now on.

Second.

#closethread.
Rules to investing: | 1. Don't lose money. | 2. Don't forget rule number 1.

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