Ron Rosenfeld <ronrosenfeld[at]nospam.org> wrote:
- quote -

Agreed. When preparing private placement memoranda the kind
of projections are restricted. But financial advisors being
prohibited from making assumptions on the future based on
what happened in the past? Happens all the time. That's
exactly what most forms of stock analysis are about.
Sometimes the results are bogus. But sometimes there are
few alternatives.

Stu

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Harry B." <harry_boscoe[at]hotmail.com> wrote:

- quote -

It does not seem there would be any point to planning if one
could not make assumptions about the future.

In financial plans I've seen, assumptions have been made
about rate of inflation, life span, returns on different
asset classes, changes in health status, life-style changes,
and other factors. These assumptions are used to outline a
course of action for the plannee (is that a real word?).

What *I* have heard said is that past performance is no
*guarantee* of the future. But that's a far cry from your
assertion.

Do you make no assumptions about the future in your own
financial planning? What does a plan look like that does
that?

--ron

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Bernard S" <berniesa[at]pacifier.com> wrote:

- quote -

Thank you for pointing that out. In this instance, there is
no such clause.

--ron

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ick Adams <rdadams[at]smart.net) wrote:

- quote -

Dick,

Thank you for being responsive to my question.

So far as the physical labor cost of maintaining two homes,
that should not be an issue. It may become so at some time
in the future, and then we'd have to decide to sell one or
the other. Hopefully not until well into the future.

--ron

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"Ron Rosenfeld" <ronrosenfeld[at]nospam.org> wrote:
- quote -

I strongly reccommend that one carefully read the fine print
on no interest instalment contracts. What happens if even
one cent is owing at the end of the no interest period? It
is very economic shattering paying large amount of interest
on phantum debt balance from the day of purchase.

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"HW \"Skip\" Weldon" <skip5700removethis[at]hotmail.com> wrote:

- quote -

No question you are correct when it comes to expenditures and
personal use capital assets that desrease in value, such as
cars and boats. But in this case, the OP is discussing a
real estate purchase. So you point may not be applicable.

The major assumption I would make here is that given thr OP
acknowledged being over 60 (something I would never admit to
in a public forum), he should consider the physical labor
cost of maintaining two homes against the amount of time from
now to selling his main residence and making the second home
his main residence.

Since he has no IRA withdrawal penalties, I find no flaws in
his logic and perceive the second home as a sound investment.

Dick

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Ron Rosenfeld wrote:
- quote -

Ahhh, once again the massively awesome power of favorable
assumptions about the future!!!!!! And in this case,
supported explicitly by observations about past performance!!
That's what financial advisors - who do this for a living -
are prohibited from overtly allowing us to dabble in....
What about the future FMV of the vacation home.... What
about the income tax already paid on the Roth conversion?

OP wants to buy the second home, that's it, game over!!

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Barry Margolin wrote:

- quote -

that is, IF a person itemizes deductions; and depending on
tax bracket. a 10% bracket produces less of a tax savings.

- quote -

I don't doubt the 14% figure atall. A couple of my funds
have averaged that over the past five years, i.e. until this
year so far. And I don't use an outside money manager,
either.

ChEAr$,
Harlan Lunsford, EA n LA

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"HW \"Skip\" Weldon" <skip5700removethis[at]hotmail.com> wrote:

- quote -

You're undoubtedly correct in your general observation.

But I would think that the situations you are considering
are those where the person was unable to pay off his debt
for some period of time, but eventually became able to do
so. Perhaps they had a negative liquid net worth.

In other words, perhaps a difference between "being in debt"
and "having debt".

There are substantial benefits that can accrue to those who
responsibly manage their debt.

Without debt, most Americans would be unable to purchase a
home, and many would not be able to purchase an automobile.
Many businesses would not be able to grow, or even stay in
business. A bad year would ruin many farmers.

In one case, I was offered the opportunity to purchase an
automobile with a no money down, no interest, five year
financing. I had $30,000 invested that I could have
withdrawn to pay for the automobile outright.

My planning assumptions are that my investments will earn 8%
per year. (My actual returns since 1999 have been 14% per
year).

By financing under the offered terms, instead of purchasing
outright, at the end of the five years, I not only own the
car, but I also have over $17,000 cash that I would not have
had if I paid outright. (Under my 8% assumption I would
have had $8,400).

The other alternative was to get $2,500 cash back. But
investing that, even without taking taxes into
consideration, would not have given me the same cash at the
end of the period.

I'm trying to do similar calculations in determining whether
to finance a second home purchase. But the situation is
more complex. The numbers are larger, and a portion of the
loan payments are deductible on my tax returns; plus I have
issues with generating taxable income by IRA withdrawals,
and the mandatory withdrawal requirement looming in seven
years.

It certainly could happen that my investment methodology
will fail to generate the required 8% over the rest of my
lifetime. But its simplicity, and real performance during
the 1999-2005 time frame lead me to believe that my
assumptions are conservative.

--ron

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"HW \"Skip\" Weldon" <skip5700removethis[at]hotmail.com> wrote:

- quote -

But mortgage debt is a little different, because of the
preferential tax treatment. A 6% mortgage is equivalent to
a 4-4.5% ordinary debt.

Also, because of the time value of money, debt can be
advantageous if the interest rate is low. If you can invest
your money and make a higher return than the interest rate
of the debt, you come out ahead.

While I'm a little skeptical of the OP's 14% annualized
return since 2000 (if he really did achieve that this
decade, I'd like to meet his money manager), historical
returns in the stock market are about 10%, so it makes sense
to have a mortgage under 7%.

--
Barry Margolin, barmar[at]alum.mit.edu
Arlington, MA
*** PLEASE don't copy me on replies, I'll read them in the group ***

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

Thank you for your thoughts, and the information on the
phaseout number.

With regard to your comment on #2, either I'm not
understanding what you've written or I wasn't clear in
expressing my options. My options are to use conventional
financing or purchase outright. It seems to me that if the
cost of borrowing money is higher than what I could earn on
it, I would be better off with an outright purchase. Since
the opposite is the case, it seems to me that I am better
off financing. In either instance, the funds would come
from an IRA. The goal is to minimize the "tax hit" so as to
maximize my future cash.

So far as your other points. They are well taken. I have,
indeed, exceeded the market return since 1999. I believe
the figures are accurate, as the computation is fairly
simple -- no contributions and only a few withdrawals. The
calculation was done using Microsoft Excel's XIRR function
which takes into account irregular cash flows.

If I were to purchase outright, I would take most of the
funds from my Roth IRA. If I finance with a mortgage, my
thesis is that if I take the funds for the deductible
expenses from my conventional IRA, the income that I have to
declare would be countered by the deductions I will claim.
I was concerned about the phaseout -- but at $145,000+, it
will not be an issue.

I am 63 and retired, so the 10% penalty is not an issue.
Back when they became available, I converted most of my
conventional IRA to a ROTH IRA, taking advantage of the five
year clause. However, I did not convert all of it. And if
I wait until age 70 to start the mandatory withdrawals from
my conventional IRA, those will likely bump me into a higher
bracket.

So, given the above, is my thesis that withdrawals from my
conventional IRA, which would be mostly taxable, will be
"balanced" by the interest and property tax deductions of
our second home on schedule A?

Just to be more complete, we will have two homes; we will
not be renting out either one; one will be a "main home" and
the other a "second home". The total debt on the two homes
is less than $1,000,000. So the mortgage interest would be
deductible, as would the local property taxes.

Any other thoughts?

Thanks.

--ron

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Ron Rosenfeld <ronrosenfeld[at]nospam.org> wrote:

- quote -

You can justify almost any decision by varying the
assumptions.

So rather than numbers, here's an observation. When it
comes to a choice between debt and no debt, I've never met
anyone who got out of debt and who later went back into debt
because they missed the benefits.

-HW "Skip" Weldon
Columbia, SC

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Ron Rosenfeld wrote:

- quote -

1 - the phaseout for 2005 started at $145,950 for joint. So
a couple thousand higher in '06.
2 - this would be a reason to choose this approach, not
against it.

There are multiple issues;

Are you sure you've averaged 14% over this period? The market
return is flat to down as the market hit a peak in 1999/2000.

Withdrawals from the IRA (you said conventional, I take that
to mean it was pre-tax money as well) are taxed at ordinary
income rates, and any withdrawals prior to age 59-1/2 are
subject to a 10% penalty.

If you are concerned about the phaseout, you are in a high tax
bracket and likely best off keeping the money in the IRAs until
youretire. There are rare circumstances where tapping
retirement money ever makes sense, and when conventional
financing is available, that's the best way to go. (More
specifics on your situation would give the ability to comment
further on your exact scenario)

JOE

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We are purchasing a second home.

A mortgage will be about 6-6.5%; I have been earning about 14%
in my conventional and Roth IRA's (since 1999).

Although we could pay cash, I have considered that it makes
sense (and would be tax-neutral) to use a mortgage to fund
the purchase; and to withdraw funds from my "conventional"
IRA to pay for the portion of the mortgage (and taxes) that
would be deductible on Schedule A.

Some problems that could occur with this strategy are:

1. Income exceeds the threshold where Schedule A deductions
start to get phased out.

2. Return on investment in the IRA drops below the interest
rate on the mortgage.

Are there any other issues to be considered?

What is the threshold for an MFJ return?

Thanks.
--ron

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