Spoca2005,

The ARM aspect of the mortgage didn't really sink in until I
read your latest post. Avoid at all costs messing with ARMs
for any long-term period. I would even seriously consider
lowering the amount in Part (A) to assist paying off this
mortgage. I explain below. If, after the mortgage is paid
off, you then want to give money to relatives, then you will
have more freedom to so do. Until then, you are taking some
risk.

I am going to continue breaking down this discussion into
two parts. Doing so still makes sense to me. You can easily
adjust the allocations between Part (A) and (B) as you see
fit.

Part (A)
Since the $40k apparently must remain quite liquid, then I
agree with your original suggestion of a bond/CD ladder, but
again, going out no more than about 2.5 years, and with
rungs maybe as little as three months apart. The rungs
should probably be no more than six months apart, for the
needs you describe. I trust you know how to set a ladder up.
In the alternative, I think a good money market mutual fund
would be fine right now as well. The U.S. has this fairly
flat yield curve inversion in place now, so it's hard to say
which option would be better. We are probably talking only a
small difference over a few year period, anyway. I trust you
understand that any judgment of how you choose to use this
windfall money with your family is really out of line. Seems
to me some families are close like yours, mixing emotion and
finances, with care and as importantly, with a view to
raising the net worth and peace of mind of the whole family
enterprise.

Arguably, the way you're using this $40k is a savvy "family
business" plan on a few levels. I hope you and everyone else
in your family understands the details, so the plan can be
tuned for optimum effect. On that note, I do not think your
parents saving for their grandchildren via U.S. savings
bonds is a good idea. That's a long-term investment, isn't
it? The return of savings bonds over a ten year period is
likely going to be much worse than other alternatives. So
your intentions here are not quite clear. You can't force
other family members to do certain things with your gift
money, after all, though you can operate on trust. (Some
professionals advise against mere trust. In other words, put
everything in writing, even with family members. It's
ultimately your call.) You seem to have these expectations
for the use of these gifts to your family members. Maybe at
a minimum a formal, family meeting is in order, to discuss
your dreams and their dreams. Have a huge spreadsheet
posterboard. Maybe do a Powerpoint Presentation. I am not
joking.

Again, it's really not my or anyone's place to place a
judgment on how your family runs things. I offer what I hope
is a polite observation to optimize the returns of the
family "business." Admittedly, you sound very intelligent
(ten-years investing; knowing about pretty much all the
vehicles). So maybe you just need a little reinforcement.
Hence this thread? :-)

Part (B)
I'm still not quite clear on the details of the ARM, but if
that mortgage payment can explode per current interest rates
after some five years, I'd pay it off as quickly as
possible. Figure what you need to beef up your current
emergency fund of $12k. (Some say a year of living expenses.
But it really depends on what the condition of one's home,
health insurance, cars, etc. are, as well as one's job
security, are.) Then beef it up. After this, I personally
would put the rest towards the mortgage. Get it paid off.

I suppose to minimize the tax implications of this windfall,
your 401(k) should be maximized this year. But in susequent
years I'd put money into the 401(k) only up to the company
matching. Put the rest into paying off the mortgage. After
that's done, post back.

One more caveat: You indicate your family is operating
globally. I for one operate based on what I know of the U.S.
economy--its health care system, its stocks, its cost of
living and college educations, its tax structure, even U.S.
family and cultural values, which do tend to translate to
spending/saving habits. A lot of this discussion may have to
be seriously adjusted for folks living outside the U.S.

Tess Millay wrote:
- quote -

Hello Tess!

Thank you for your comments. I am back to the forum after about 10
days.

First of all, I finally submitted the signed letter on January 10th
that I am ready to accept the payment on January 31st (if I did not
take the action, it would be cashed by March 31st anyway).

Here are some details about part A of the money. The 40k set-aside for
my borther/father is kind of "fungible-money" -- could be used for
different purposes. They both live overseas; my borther has finished an
undergraduate degree in Electronics, but does not yet have a job.

1. If he gets a job, the bulk of money could be used to buy him a
flat/condo -- about 1200 to 1500 sq feet, in a 8-10 storey building
will cost about 35K to 60K USD, so I could pay for about 50%, and the
rest he could take on as a mortgage; his starting salary in local
currency would likely be equivalent to 8K to 20K per year.

2. About 20K could be used to add a second story to my ancestral home
where my parents' live (and I visit about 2 to 4 weeks per year). I
might retire there in 10 to 15 years -- who knows.

3. I generally remit about 4K to 8K to my parents each year, of which
they end up saving about 50% to 75% in grandchildren's names, using
local version of US savings bonds. My parents have a total of 5
grandchildren (2 of my babies; 3 of my sisters's) This remittance is
budgeted part of our (me & my wife)'s annual expenses. So, part of the
set-aside could be thought of as the capital for next few year's
remitances.

4. Basically, my parents are well-off by local standards even without
any set-aside and/or remitances from me: paid-for house, about 20 acres
of farm land, they sell about 80% of the farm produce which is more
than enough to meet all their expenses, including medical bills, plus
some savings. It certainly helped me get through college, and my first
trip to Canada for an MS many years back.

5. Being able to bug savings bonds on a regular basis for their 5
grandchildren, even if it is just a conversion of the remitances I
send, provides happiness to them, and that, in turn, provides
additional happiness to everyone in the family. My wife and I consider
this happiness/joy as a part of the "overall return".

Sorry about the rambling nature...

- quote -

Wifey and I are also thinking that perhaps it's time to prepay some
more of the mortgage principal, since we are debt-averse people (I
wouldn't touch the advice $cott, the mortgage guy, with a 100 foot
pole...)

We have an 8 year old mortgage, which we paid an accelerated rate for
the first 5-6 years. Reduced motgage amount from 322K to about 222K.
But for the past 20 months, we have not made any extra principal
payments. Presently, paying only $1250, the amortized amount, (rate is
4.5%, fixed for another 5 years, then it will be like 1 year ARM).

Alternative idea is that rather than paying $750 extra principal each
month, I put that in a DRIP (BAC? IIBK?), and if the mortgage rates
increases after 5 years, cash DRIP and pay down principal. Also, in
another 5 years, if I stay at the same employer, I am expecting (but
NOT counting!) another windfall that should pay off the mortgage
completely.

I wish could have some idea of how mortgaget rates are gonna look like
in 5 years

- quote -

My daughter (4 years old) is right now overseas, with grandparents & my
sister, going through full language and culture immersion. So we are
planning a big party when she gets back in May. Not too many other
ideas yet -- cruise, etc., don;t sound fun with two 4 year and 1.5 year
old babies.

- quote -

I'll aprpeciate your insights.

Spoca2005 -- a 10-year do-it-yourselfer, in terms of investing, home
buy, etc.

spoca2005[at]yahoo.com wrote:
- quote -

Aha! Makes sense now.

- quote -

The way it works is that if you've already sold shares of a specific
mutual fund using "average cost" basis, you must continue to do so. If
you haven't sold any shares using that method, you can use either "FIFO"
(first in, first out) or "specific identification" of share lots, by date.

And for the record, if you sell using specific ID or FIFO, you can later
switch to "average cost" for future sales. But once you use average cost
you can't switch to a different method, for a given mutual fund.

Logistically: make sure it's actualy sold using specific-ID by sending a
written instruction to the fund company about which shares to sell, and
receiving a confirmation regarding the lots sold. In practice this is
just a "CYA" letter for the tax file but if it isn't there the IRS could
force you into another basis method, if audited. Just call your
broker/custodian and tell them you're using specific ID. They'll tell
you what to put in the letter & where to send/fax it - or might have a
way to do this online.

Also, is there any way to use larger
- quote -

No, the maximum capital loss that can be applied against ordinary income
is $3k. Anything above that would be carried forward to the next tax
year. (speaking here of mutual funds sold at a loss)

My wife has about 30K in ESPP stocks -- overall it's
- quote -

Be very careful with ESPP shares - they're a different beast and have
some different tax rules (even with loss shares). That's one to discuss
with an accountant or perhaps the ESPP custodian, who should have a tax
guide of some kind to give you.


- quote -

On the bright side (kind of) - in the year you receive all this income,
you'll probably be taken out of AMT, because so much of your income is
being taxed at 33%+. Not that that's a great thing...it just means
you're paying a higher tax rate than the AMT rate. Of course you should
check that late in the tax year, based on whatever the AMT scheme looks
like at that point - it's likely to change by then.

-Tad

Tad Borek wrote:
- quote -

1.]

- quote -

Tad,

Thanks for this idea. I think her company allows this (mine does), so
in the year that she is going to quit work, we will use this method to
max 401(k) contributions early in the year (as well as use up all FSA).

- quote -

Thanks for this tip -- I was under the mistaken assumption that for
mutual funds, only average basis could be used. I think I'll be able to
generate some loss by selling some selected purchases from my Strong
Enterprise fund (now Wells Fargo). Also, is there any way to use larger
than 3K loss? My wife has about 30K in ESPP stocks -- overall it's
break-even (current value is close to all the post-tax contribution),
but the chunk from 2000 and 2001 is seriously under water. I could
choose to sell just this portion.

- quote -

Ah, but that will increase my Federal AMT -- this one is absolute nuts!
First I have to pay 9.3% tax to California on all the extra income (no
choice), but that tax payment increases my Federal AMT. Really insane
...

- quote -

Hi, do-it-yourselfer of 20+ years here.

It seems to me you should break up this query into two parts
as follows:

Part A:
What exactly to do with $40k that you (and I hope your wife)
want to use to help your parents and brother. In which case,
I think to answer intelligently, the group would need more
information on the nature of financial assistance they need.
E.g. monthly living expenses for the brother for a year, so
he's on, ahem, allowance from you (and your wife) for a
year? Help him with a down payment on a condo? Parents have
medical expenses or something devastating? This Part A is
really about the brother's and parents' financial planning,
to some extent. If it's all private, just say it's gotta be
$40k, and it's gotta be liquid over the next few years and
so therefore low risk. I like the CD ladder for this,
assuming, with this yield curve inversion, you go out no
more than about 2.5 years.

Part B:
What to do with the remaining $35k. I would also consider
(1) paying down the mortgage with some of it (but I might
ultimately reject this); (2) long-term retirement planning,
including, in particular portfolio allocation details. It's
time to compute how much you must save each year to retire
by 20--, especially with your income halving soon. Also,
your emergency fund of $12k does seem rather spare, but with
#4, that will be doubled. Lastly, I do think it's a good
idea to blow a thousand bucks (maybe closer to two thousand)
on something and enjoy your windfall with your family. Get
it out of your system.

If you can elaborate a little on Part A above, or otherwise
clarify what is going on here, then I'll add another two
cents.

spoca2005[at]yahoo.com wrote:
- quote -

[sorry if you hashed thru this on M.T.M...didn't read there...]

Well here's one possibility for saving some taxes while socking away
some retirement money...if your wife is going to work for a couple
months in 2006, and her 401k plan allows her to set a high contribution
rate, she could increase her contribution rate to a high percentage -
even 100%, if allowed - so she hits her $15k annual contribution limit
for 2006 by the time she leaves. Her taxable income for 2006 could end
up being $0, because she deferred it all into the 401k. She should check
this tomorrow if she's still working.

Contrast this to her working 3 months while adding to the 401k at say a
15% deferral rate, on $90k in annual income. Ignoring the ancillary
payroll deductions, that's $22.5K in income, and just 15% of that,
$2275, would go into the 401k. There would be $19k in taxable income,
all being hit at your top marginal rate (because of your $200k
windfall). And you couldn't knock it down with an IRA contribution or
anything like that.

Would that be possible?

The other thing that comes to mind is doing enough tax-loss sales during
2006 to get to $3,000 in net capital losses, so you knock $3k off that
taxable income for the year - sounds like that's worth about $1400 in
tax savings to you. This may not be possible, it depends on your mutual
fund portfolio and plans for realizing other capital gains during the
year. Keep in mind that you may be able to sell mutual funds on a
lot-by-lot basis, so a dividend-distribution reinvestment from 2000 may
be underwater now and a candidate for a tax-loss sale.

Last, be sure to eyeball your projected CA taxes owed vs. taxes deducted
from your paycheck, to see if it makes sense to make an estimated tax
payment in Dec 2006 (which would land on Sked-A as an itemized deduction
for tax year 2006). This is going to be complicated because of
phase-outs & whatnot, talk w/your accountant.

Oh and I think you get the award for "Earliest Tax Planning - 2006". =)

-Tad

I will have an extra 200K of wage income coming up later this month
(for details google my post on misc.taxes.moderated). That's large to
me, 'cause it's nearly twice my annual salary.

There's very little flexibility in receiving the payment: it must be
received between January 31, 2006 and March 31, 2006. It will be
ordinary income, and employer will deduct ordinary payroll taxes. I
have consulted one local tax professional, and also posted on
misc.taxes.moderated & fairmark.com -- basically, given my profile (see
below), there's really no way to minimize taxes on this. I'll simply
have to grin & bear the almost 50% tax hit.

After taxes, I'll be left with about 105K of take home money. In
February, I'll have to payback an "employer loan" (was used to exercise
some options), so after that I will have 75K left. I would welcome
financial planning ideas for deciding what is a better use of this 75K
money, given the following profile.

-- Married with 2 children; both spouses working; all US citizens
-- Calif resident; both maximizing 401k (14K each); NOT qualified for
Roth
-- Funding 529 for both children at $3k/year
-- 2004 Gross income: 215K (me: 125K; spouse: 90K)
-- 2005 Gross income: 420K (due to the one-time 200K extra wage)
-- Starting 2006 gross income will be about 125K range (wife is
planning to quit job)
^^^^^^^^^^^^^^^^^^^^ IMPORTANT
^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

-- Mortgage: 220K, 4.5% interest, 7/30 loan (7 years fixed; then 1
year ARM).
-- Mortgage payment = 1250; Equity in home = About 300K (no plans to
sell).
-- ZERO other debts (The 30K payback to employer, already accounted
above)
-- Emergency fund of about 12K, in Vanguard short term bond fund
-- Nonretirement savings: mutual funds + 2 DRIPS ==> total 275K
-- One car 2 years old; one car 10 years old; both fully paid and in
good shape.
-- Employer stock (not options) worth 250K, with 50K basis. I had
meant to sell some of it and diversify, but becuase of the extra
January wage, I'll need to wait.

So far, I have the following "boring" plan for the 75K:
1. Put aside contribute an extra 5K*2 = 10K to the two 529 plans.
2. Put aside 40K in laddered CDs to help my brother (a new college
graduate, looking for job) + parents.
3. Start another DRIP and over a year invest 12K.
4. Put aside the 12K for future home expenses (what kind of vehicle?).
5. Use the remaining $1K to fund pleasure activities.

Thanks.

SPOCA2005