| Using investment to pay off debt |
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littleroc02us
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quote:
Originally posted by Grains
I have not built an emergency fund and accumulated some debt. Unexpected things come up sometimes so now I am trying to figure out the best way to eliminate the debt
I'm not trying to harp, I just being real. So if your not living within your means and you haven't saved up an Emergency fund, then what is your plan long term to stay within budget? I have a lot of experience with budgeting between my business's, rentals and personal life if you'd like some ideas.
Risk comes from not knowing what you're doing. (Warren Buffet)
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Fri Oct 24, 2014 2:13 pm |
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Publius
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I'm in total agreement with Wino here. I, too, see the your example about the market tanking while you hadn't paid off the debt as market timing. True you are forgoing the guaranteed 4% or so return on not paying the interest, but this runs counter to your general premise not to look at short term movements of the market, but instead look at the average growth of the market over the long term. True, your actual return at the end of a down year would be worse off then if you had paid off the mortgage, but your investment strategy asks that you ignore that and wait for the recovery of the markets that you expect in being a buy-and-hold investor.
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Fri Oct 24, 2014 2:15 pm |
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Publius
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Grains, back to your original question. If you are living off of the dividends of your trust, but the rate of return of the trust is lower than the interest you are paying on your consumer debt, yes it makes sense to liquidate some assets and pay off the debt.
How much are we talking here? By that I mean, how does this debt compare to the size of your trust? 5%? 50%? The markets are up substantially over the past few years, so this isn't a bad time to sell.
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Fri Oct 24, 2014 2:19 pm |
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littleroc02us
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Wino, what your forgetting is that paying off debt is a gaurentee % rate of return, whereas whether the market goes up or down, nothing is guarentee. You have to calculate for risk. You or I cannot time the market and we have no idea what is going to happen in the future. So unless you have a crystal ball, I'm paying off the debt if it were me and I do in my own life and I'm doing quite well with my investments.
Risk comes from not knowing what you're doing. (Warren Buffet)
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Fri Oct 24, 2014 2:27 pm |
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Wino
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quote:
Originally posted by littleroc02us
Wino, what your forgetting is that paying off debt is a gaurentee % rate of return, whereas whether the market goes up or down, nothing is guarentee. You have to calculate for risk. You or I cannot time the market and we have no idea what is going to happen in the future. So unless you have a crystal ball, I'm paying off the debt if it were me and I do in my own life and I'm doing quite well with my investments.
I'm fully on the "pay off the debt" side of the equation. All I'm talking about here is paying it off so quickly that you miss out on more valuable opportunities, or if you pay it off more slowly - still with the goal of paying it off "quickly" - and take advantage of "free money."
Here's another way of looking at it. Would you rather pay off $20K of debt in four years, making $53K per year, or would you rather pay off the same $20K in two years, making $50K per year the first two years, going up to $53K per year the last two years? That "income" is what one loses by foregoing the employer match.
Like I said, I pay off more slowly so I can keep doing my Roth - which is NOT going to happen next year because of income increases. Without the Roth I already have, I'd have zero tax-advantaged investments from over here. Next year, I think I've become one of those hated "rich people," because I will make too much money. It's a shame, seeing that I've worked my whole life for very little retirement, and now that I can actually set aside some money, they won't let me.
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Fri Oct 24, 2014 4:44 pm |
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littleroc02us
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Or not miss out on valuable opportunities. We just don't agree on this philosophy and that is ok. My wife and I enjoy not having payments, except unfortunately two mortgages that we have paid down drastically, but not having any revolving debt, we have more peace of mind then someone who is constantly worrying about revolving debt. Both methods can lead to financial security IMO, you have to be ok with your risk level in these matters.
Risk comes from not knowing what you're doing. (Warren Buffet)
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Fri Oct 24, 2014 7:29 pm |
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blixet
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quote:
Originally posted by wino
Like I said, I pay off more slowly so I can keep doing my Roth - which is NOT going to happen next year because of income increases. Without the Roth I already have, I'd have zero tax-advantaged investments from over here. Next year, I think I've become one of those hated "rich people," because I will make too much money.
How about doing a back-door Roth next year?
Information is more valuable sold than used – Fischer Black
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Fri Oct 24, 2014 9:06 pm |
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Wino
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quote:
Originally posted by blixet
How about doing a back-door Roth next year?
I'm looking in to it. The problem is that I have some converted IRAs from 401Ks and my wife has even more. Due to this, I'd have to pay some taxes or else shift the IRAs to 401Ks (backwards from most 401K to IRA conversions). Anyway, because I'm overseas, I don't have any company 401K, nor do I qualify for a SEP, as I'm not self-employed.
I'm looking in to having my wife earn some self-employment income, and opening a solo 401K for her (and thereby one for me, as well). I could then do the un-rollover. The problem then becomes that the IRA amount is very large, so I'd have to figure out the taxes. Further complicating this is that much of her IRA money came from her divorce, so I have no access to those records. From that, I'd have no way to know how much is gains and how much is contributions...
When you add in the effect of my foreign income exclusion and housing exclusion, which becomes a deduction if I am self-employed... well, this means that I have about twenty different variables I'd have to "get right" for the IRS not to come after me for even more money.
Since I'm 53, the tax benefits of the Roth gains from "future" Roth investments or conversions probably aren't enough for the trouble I'd go through to take advantage, especially since I'd be paying a lot of taxes whichever way I go.
Then, let's add in the fact that I don't have to pay 15% of my income into self-employment tax (social security), but I might have to if my wife is self-employed and I'm then part of her plan.
I'm going to consult a tax guy over here (we have US tax folks here) and see what he says. Right now, I'm figuring it just isn't worth the effort and probable audit bait that it would become by the multiple conversions and apparent dodges done that might or might not be legal. Setting up nearly 4 million words of regulations for taxes* pretty much guarantees that anything that can't be put on the 1040EZ form probably has violated some provision of the tax code.
So, I probably won't do the backdoor Roth until I get a "real job" again back in the US.
*http://www.washingtontimes.com/news/2014/apr/15/4-million-words-us-tax-code-seven-times-length-war/
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Sat Oct 25, 2014 6:31 am |
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blixet
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Tracking that basis can be a pain. When I started doing partial conversions in retirement, I went back to tax returns from the '80s to try and find 8606s for a few years of non-deductible IRA contributrions and as far as I can tell, my tax preparer never filed them. I was stupid for not looking the returns over closely at the time. And then 2 years ago I did catch my preparer screwing up on an 8606 for a conversion (seems like you never get rid of the basis problem unless you convert it all). For us, it should be worth it down the line, not in a life changing sense, but definitely profitable. Assuming (!!!) that the IRS doesn't change the rules to work against us somehow in the future (and one of us lives long enough). It would hurt if they do something like lower marginal rates and make it up elsewhere like a VAT.
Information is more valuable sold than used – Fischer Black
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Sat Oct 25, 2014 2:08 pm |
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