joetaxpayer <joetaxpayer[at]nospam.com> writes:
- quote -

It's not only about that $30k being possibly interpreted
as a gift (only a likely consequence if the lender dies
before it's repaid). The ongoing situation is one of
"imputed interest". The IRS may consider a 0% rate of
interest to really be a market rate (say, 5%) on which the
lender owes income taxes (in this case, potentially
income taxes on approx $1500 of such phantom income).
The rules are kind of messy, but if the amount a lender
has lent is less than $100,000 (as in this case), the
imputed income may be zero - if the *borrower* (surprise -
not the lender!) has a net investment income of < $1000.
Or at least that's as I understand it from an article I
read. In the real world, I don't know of anyone who's
borrowed money informally (ie. not through Circle Lending
or with paper-documented interest and repayments) who
has gone through these computations.

There are also potential gift tax consequences for the
imputed interest - not the principal! - which may need
to be dealt with - the imputed interest, which was not
paid - is treated for IRS purposes as if it *were* paid
and then given back to the borrower as a gift. For all
but the biggest loans, as long as the lender didn't give
the borrower a heap of additional gifts that year, it's
probably not an issue, but it may be.

As I said, if you really want to do right by this, see
a competent tax lawyer or accountant.



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In article
<1187299176.361469.265390[at]g12g2000prg.googlegroups.com> ,
mike[at]jadoti.com says...
- quote -


First priority - build up a "rainy day" fund. I would just stash
that $1K/month in a very safe place, like laddered bank CDs or
something like that. And continue until I had at least twelve
months of minimal living expenses.

Never dismiss the value of sleeping well at night.

Then, I would just pay the extra to the mortgage. While keeping
up the minimums to the student loan and the personal loan.


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- quote -

Thanks Elizabeth, I wrote this response prior to getting your
previous one. Thanks much to all for not only telling me *what* I
should do but also helping me understand *why*. I think I have my
goals in order now.

Thanks again,
Mike

"Mike" <mike[at]jadoti.com> wrote in message
news:1187365903.998135.179290[at]x35g2000prf.googlegroups.com...


- quote -

Yes, those 3 items are your immediate concern. You said you would have the
zero-interest loan paid in 5.5 years. Because that is free money, there is
no financial reason to pay anything additional. When it is paid, you will
have additional discretionary income, at which time you can re-evaluate. (In
fact, an evaluation of your financial situation should be done at least
annually. I like to do this at New Year's.) Anyway, as your income
increases, or you have gotten your emergency fund at the right level, you
can begin addressing your other concerns. It sounds as if you are becoming
debt-averse. Your student loan is at a very low interest rate, but if that
is gnawing at you, you could begin to do something extra on that only after
all other priorities are well-funded.

Elizabeth Richardson

- quote -

So my understanding is to put it toward funding an emergency fund,
then retirement and mortgage payment. The zero-interest loan and
student loans I should just leave alone?

Mike

Elizabeth Richardson wrote:
- quote -

The $100/mo will pull this mortgage in from 30 years to just over 21.
It's a remarkable thing to run the numbers. An additional $100 on top of
that only drops it to about 17.
Given the priorities, not too surprised at 4th place, and I'll vouch for
your advice here. His follow up was the missing detail needed to
formulate the better responses.
JOE

"Mike" <mike[at]jadoti.com> wrote in message
news:1187359702.808332.30850[at]z24g2000prh.googlegroups.com...
- quote -

Good for you to be getting your debt paid so that you can even be asking
this question! If I were you, my priorities for this increased disposable
income would be:

1. Increase your retirement savings. Contribute to an IRA, a Roth if your
income will allow, and max it out. My personal preference is Vanguard, but
both Fidelity and TR Price are other good companies. Increase your
contribution to your 401k.

2. Build up your emergency fund. Many experts say you need 3-6 months
expenses. Evaluate your job security and the employment picture in our area
to determine the right level for you. Also think about what could go wrong
and how you would pay for it - major home repairs/damage not insured, major
auto repair, that kind of thing.

3. You don't mention a car loan and I congratulate you. But how will you pay
for the next one? Put a little aside.

4. Pay an additional amount to the principal on your mortgage. As little as
$100 a month will get that sucker paid off early and allow you to get out
from under while you're young, yet old enough to be able to consider a
shorter work week.

5. If there you still have a few dollars left after the above, start some
sort of account for your children's education after high school.

I'm the Elizabeth that Joe referred to, so readers may be surprised to see
I've put paying the mortgage in the 4th position. But you can see that I
think you can do all of the things on the list by carefully splitting up
that $1000. And, when you get that personal loan paid, you'll be able to do
even more.

Again, congratulations!

Elizabeth Richardson

BreadWithSpam[at]fractious.net wrote:
- quote -

True - but if it was set up correctly the interest would be well below
the gift limit, and since the OP is making regular payments, there's a
paper trail to substantiate it wasn't a $30K gift.


Daniel T. wrote:
- quote -

OP posted more details, which tell me that more than anything he needs
to fund his retirement accounts. But from both your replies, I
understand to be careful, that it's more than 'feeling good' regarding
the $30K. I missed that the house payment included insurance, so it's a
30yr loan. My advice is now to split that extra $1000 between the
mortgage and retirement savings, after he confirms he has enough
emergency money, or access to emergency funds.

JOE

joetaxpayer <joetaxpayer[at]nospam.com> wrote:
- quote -

Yes, and what is the risk of the OPs benefactor dying? What will happen
vis-a-vis his $33K debt then? 0% interest is only half the story in this
case. If the OP has reason to believe that the debt will be forgiven if
his family member dies, then all may be well in the world, otherwise it
may be in his best interest to pay it back ASAP.

On Aug 16, 5:31 pm, joetaxpayer <joetaxpa...[at]nospam.com> wrote:
- quote -

You're right, I did leave out some details... here's the bigger
picture:

I'll be 30 in a few months. I'm divorced, have two kids that I have
half time, and I get to claim one of them each year on taxes. I also
have a live-in girlfriend and her daughter, both of which I claim come
tax time too, but our finances are separate. Not planning to have any
more kids.

I've made some dumb moves on my retirement savings in the past, having
cashed out some 401k's when leaving jobs (I know, I know). So my
retirement savings with my current company is a little over $3k,
putting in just 3% which is the max my company will match (100%). I
have no other retirement savings, and I have just over $1k in the bank
for a mini-emergency fund.

The mortgage is actually a 30 year that I just got last month, the
1020/mo includes Insurance & Taxes.

The family member who loaned me the money and I have a healthy
relationship And paying off my debt is definitely a goal, however,
that debt alone will be paid off in 5.5 years just making the normal
payments. It's the 30yr mortgage and 30yr student loans
(consolidated) that I'm worried about.

Thanks again for everyone's time.
Mike

joetaxpayer <joetaxpayer[at]nospam.com> writes:

- quote -

True enough, but I'd also like to mention that these folks -
both the borrower and the lender of that $33k - might ought
to consult an accountant or lawyer - the loan may nominally
be interest-free, but the IRS doesn't see it that way.

Google for "Imputed Interest". The SmartMoney article
that comes up is pretty clear. (The lender may owe
income taxes on an imputed interest of some $1600/yr
on that loan - and if the lender is also giving the
borrow gifts, it may have gift-tax implications as
well).



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Lon wrote:
- quote -

It's tough to tell a poster to pay the zero interest debt. OP will have
an extra $1K per month, and the real issue for me is now knowing the
rest of his financial situation. That $33K you'd like him to pay back
could become $50K (due to tax break) in his 401(k), matched to become
$100K, and in 3 years worth $125.
His shrink may offer him the same advice you did. Maybe the relationship
with the relative isn't healthy, and he'd somehow be happier once that's
paid. But putting on the 'planner' cap, my goal is to maximize his
wealth, within the envelope of his risk tolerance.

JOE
www.blog.joetaxpayer.com

On Aug 16, 2:53 pm, Mike <m...[at]jadoti.com> wrote:
- quote -


I can't believe some of the suggestions that you are getting and I
will probably come across like a conservative old fart, but other than
your mortgage, pay off your debt man. You owe it, what difference does
it make if your personal loan lender is in no hurry, you owe, so pay.
I think there would be a great psychological advantage to saving/
investing once you get out from under that burdensome debt. It's
always hanging around like a ring in the bathtub until you get rid of
it.


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On Aug 16, 2:53 pm, Mike <m...[at]jadoti.com> wrote:
But after that, I have no idea where to put the roughly
- quote -

Put $250 a month into paying off mortgage principle. You can do this
once a year for convinience if you wish. Put $250 a month into a
rainy day savings account until you have 1 years living expenses. Put
$250 a month into a widely diversified stock portfolio or index that
you won't touch until retirement. Put $250 a month into having fun.
(You only live once, but you are dead forever.)

This is a nice problem to have. Lot's of good solutions. Good Luck!

On Thu, 16 Aug 2007 16:53:32 -0500, Mike <mike[at]jadoti.com> wrote:

- quote -

How long do you have?
Thumper

Mike wrote:

- quote -

First, I'd be negligent to not ask;
What is the status of your retirement savings? 401(k) maxed? Does your
employer or your wife's offer matching? You see, a 50% match is worth
more than even paying down that CC debt. Even with the 401(k), do you
fund your IRA, Roth or regular? Do you have kids? Planning to?
If you've been lurking you know what's missing, age, marital status,
goal for early retirement, and likely a few other tidbits.

Kids can cost the time your wife is out, as well as all the new expenses
a baby brings. A cash nest egg is appropriate for such an event.

Here's a thought: Your numbers imply a 15 year mortgage. An extra $1000
to the mortgage would pay it in full in 6 years. I can offer you the
lecture that says the market will likely return 8%+ over the next 10
years, and at cap gains rates, net you a 6.8% return post tax. But wait,
with only $6500 or so in interest, can you even itemize? You have enough
property tax and state tax to be over the standard deduction? If not,
the chance to make 6.8% vs a sure 6.5%, well, sounds like no-brainer to
me. No one ever complained they paid off their mortgage too soon. (And
yes, Elizabeth, I've come to see this the right way, your way, mostly)
good luck.
JOE

Hello,

I've been lurking on the list for a few months and I want to first and
foremost thank
everyone for the great advice that I've gleaned from the many posts
over that time. I
have a question of my own that I'm not too sure what I should do and I
appreciate any
help I can get.

I am working on reducing my debt (better late than never) and I'm
kinda lost on how I
should proceed with paying it down, or (and this is the big question)
should I bother
paying it down in advance...

My debt is structured like so:

$7,000 - credit cards
$33,000 - personal loan (0% interest for life, paying $500/mo, owed to
a family member
who's not too concerned with it being paid back early)
$55,000 - student loans (3.35% interest (locked in), paying $290/mo)
$112,000 - mortgage (6.5 or 6.75% interest (not sure off the top of my
head, but locked
in), paying $1020/mo)

I am working feverishly on paying down the credit card debt, and it
will be gone by
January. But after that, I have no idea where to put the roughly
$1000/mo disposable
income that I have left.

In my thinking, the mortgage rate is not bad, the student loan
interest is not bad at
all, and the personal loan interest can't be beat. Given that the
mortgage and the
student loan interest is all tax deductible, should I even bother
paying any of them off
early? Or should I sock the money away elsewhere? What would be more
beneficial in the
long run?

Thanks again for any help!
Mike