What to do with $100K? 52, retired spouse, taxes eating us alive!

[Own2Feet]

Hello, I am Own2Feet, age 52, still slaving away full time, dreaming of taking off the workaday mask and going back to Who I Really Am by 56, Good Lord willing and the Bail-out doesn't ruin my plans.
I've been lurking on these forums for 2 weeks, enjoying the discussions and seeing some thoughtful advice being dispensed. Sure could use some of that in a particular situation we have:

So...(cue loud splash as I jump in, feet first):

Question: In 2008 we borrowed $100,000 for 10 years at 4.99% (no points/fees) to buy an investment property. Our tax advisor said our interest on this loan, if used for an investment (real estate or any other kind) would be fully deductible, even if we should be unluckily subject to AMT.

For various reasons, we backed out of buying the property. Now we are stuck with loan payments of $1060 per month. There is a prepayment penalty if we hold the loan less than 2 years. We still want to invest the $100,000. Our tax situation, based on 2007’s return:

• 31% marginal tax bracket,
• 22%% effective tax bracket
• pay 8 % in state and local income taxes
• property taxes 3% of our gross income.
• 6% state sales tax.

2007’s tax bite, including property and sales taxes, was 42% of our gross income. (Makes it a little hard to achieve those 60% savings rates I’ve been reading about in these forums!)
I would greatly appreciate the benefit of others’ opinions on how they might invest the $100K if they were in our position. I recognize that knowing our present assets and allocations would be helpful, but I’m a little shy, yet, of sharing all that on a public message board. Hope you all are understanding.
Thanks very much for any advice and ideas.

 

[honydonk]

some thoughts

Hi,

If you can let us know which state u are it helps. Pls looks at vanguard tax free fund . It has a yield of 4.6% which is more than what u are paying.

Look at WAMU CD's they are paying 5% . Deposit at the highest paying CD is what i can say. With about 20000 invest it in MLPs . Some of them are at 10% right now.

BDC;s like ACAS is paying 19% . So effectively you will pay 9980 for 2 years in interest. By investing 20000 in ACAS u will get 6400 for 2 years. The remaining u can put in a 5% CD and u come out on top.

CEF's are paying 10% . So investing 10000 in ETO with an effective yield of 10% will get u 2047 dollars for 2 years. So u can made up the interest with investing 30000. The remaining 70000 at 5% will make u a profit of about 8000 dollars so thats not bad.

So search on the internet there are everbank CD's etc that u can use to overcome 4.99 % .

Good luck.

 

[militaryman]

Be open to ALL options for the $$ as the "tax savings" may not be what you think they are.

For instance if you have ANY credit card debt at 7% or above I'd say your better off paying that off and cutting up your credit cards.

What about car payments? If you have those what are the interest rates?

Realistically in two years you should probably pay the loan off when the prepayment penalty goes away. The only way you should just invest it in another investment versus paying it off is if you can answer this question....

If I did not have this $$ already -- is this investment that great that I would be taking a loan (I'm assuming mortgage) out to in this investment? If not, pay it off.

 

[Own2Feet]

Thanks, folks, for the ideas and good advice. I am curious, though--isn't WAMU out of business? How can their CDs be safe?

What state we're in -- Maryland.

cheers

 

[JohnF]

Own2Feet,

Does that monthly payment include P&I?

 

[samclem]

Thanks, folks, for the ideas and good advice. I am curious, though--isn't WAMU out of business? How can their CDs be safe?

What state we're in -- Maryland.

cheers

They were bought out, and (if they are still issuing CDs) they are FDIC insured. There's talk of the FDIC insurance limit being raised from the current $100K, but you'l want to stay comfortably under that limit (so your accrued interest doesn't cause you to go over the limit), especially in a bank that isn't 100% rock solid.

You're probably not going to make any money on this investment. If you don't have any other higher interest loans, youmight take a re-look at the prepayment penalty--is it small enough to be worth paying just to avoid the hassle of investing/selling over a couple of tax years?

Two other thoughts:
1) Credit unions: Often offer higher interest rates than banks. If you're already a member, check them out, or go online and look for a high rate in a CU with loose membership rules.

2) Do you want to gamble? Some folks believe the stage is set for inflation to take off. Government expenditures are likely to go up if the promised giveaways materialize, and printing more money is less painful than raising taxes. Certain aspects of the present credit "crisis" and the government response is encouraging other people to assess that inflation may rise. If you want to bet on this, then invest in something that does well in an inflationary environment and pay off that low-interest loan in dolars of declining worth over the next 10 years. I wouldn't try this myself, but some folks would encourage it, particularly as a "hedge" if either your portfolio or your job is likely to be especailly adversely affected by inflation.

 

[Urchina]

Hi, Own2Feet. Welcome to the boards.

We also hold a loan with a prepayment penalty, but are paying it off as quickly as possible. Our plan is to get it down to some small amount (say $1000) and then just let it ride until the prepayment penalty expires. That'll limit our interest exposure.

I checked the website for the Bank Formerly Known as WAMU today (bought out by JP Morgan Chase last week) and they are still offering the 5% CD on 12 and 13-month CDs. FDIC insured and backed by JP Morgan Chase at this point. Might be a nice option for you if you plan on just stashing the cash.

Do you have an accountant you can go to for help in sheltering yourself from taxes?

Good luck!

 

[Own2Feet]

Thanks, friends, I will check into WAMU CDs.
Must admit, I am tempted by the "hold out, inflation's coming" idea. At my age, inflation is a horrible memory from teen years (late-life child; dad retired when I was 16, then watched his small pension erode to almost worthless, and our standard of living drop until dad, mom, and I all had to get jobs). I kind of like that idea of making inflation work for me. What investments tend to do well during inflation?

The loan payment is all P&I (we pay taxes and insurance directly). It's actually a Home equity loan, through Pentagon Credit Union. Their 7-year CDs is paying 4.6%, but that is an awfully long time to tie up $$, especially if inflation is on its way.

 

[segfault]

Urchina,

I think you're describing an early payoff penalty. A prepayment penalty would be assessed as the extra principal payments are made, so you'd still get dinged by it if you paid the principal down.

 

[Own2Feet]

I stand corrected. Our loan has an early-payoff penalty, which will be assessed if we pay the loan off in less than 24 months. After 2 years, we could pay it off without penalty. I thought that was the same as a prepayment penalty....

 

[Freeatlast47]

Hi,

If you can let us know which state u are it helps. Pls looks at vanguard tax free fund . It has a yield of 4.6% which is more than what u are paying.

Look at WAMU CD's they are paying 5% . Deposit at the highest paying CD is what i can say. With about 20000 invest it in MLPs . Some of them are at 10% right now.

BDC;s like ACAS is paying 19% . So effectively you will pay 9980 for 2 years in interest. By investing 20000 in ACAS u will get 6400 for 2 years. The remaining u can put in a 5% CD and u come out on top.

CEF's are paying 10% . So investing 10000 in ETO with an effective yield of 10% will get u 2047 dollars for 2 years. So u can made up the interest with investing 30000. The remaining 70000 at 5% will make u a profit of about 8000 dollars so thats not bad.

So search on the internet there are everbank CD's etc that u can use to overcome 4.99 % .

Good luck.

I am in the similar situation of high tax state... unforturnately I don't have the luxury of moving because we have a house and DH works here...

Ok I am a newbie what is "BDC" "ACA" "ETO" and "CEF" Are these FDIC insured or tax shelters?

So far the only thing I have come up is a CD from ING offering 4% and my local Credit Union only offering 3.5% for a 4 Year CD.