Don't sacrifice tax shelter to pay debt

Dear Bruce: I’m 30 years old with a household income of $80,000 a year. Currently, we owe $18,000 on my wife’s student loan at 4.375 percent with monthly payments of $221 for another seven years. My student loan is $14,000 at 5.5 percent with payments of $434 for three more years. My car payment is $300 for another 34 months at 3.99 percent. I have $4,300 in a value trust and $1,700 in stock. We also invest $1,000 a month in a 401(k) and Roth IRA. Would you sell the investments and put the retirement investments on temporary hold to get out of debt? The way I calculated it we would be out of debt in 24 months. – Reader, via e-mail

Dear Reader: The last thing I would do is put your retirement investments on any kind of hold. You are 30 years old, which means you have 35 to 40 years to take advantage of the tax deferment that retirement accounts offer. Every dollar you put in will work in that tax-deferred environment for 35 or more years. To give that up just to be “out of debt” earlier, in my opinion, would be a major mistake. First of all, think in terms of compensating balances; you’ll find you would not really be out of debt any quicker. Since you are talking about investing the money, what difference does it make if you owe a dollar to company A and have a dollar invested in company B? You are still no richer or poorer. You young folks are doing very well, and I would continue your focus. To give up one dollar in tax shelter, in my opinion, is very foolish.

Dear Bruce: I have always run on a cash basis. I pay for everything and if I can’t afford to pay for it, I don’t get it. I am talking to some of my friends and they charge everything on their credit card. They pay it on time but they also get miles. A couple that we are very friendly with is going to Las Vegas on “free tickets.” These are all miles they have earned by using their credit cards. I’m starting to think that I’m missing the boat. Am I? – N.W., Toledo, Ohio

Dear N.W.: You sure are. I never thought the day would come when I would watch our family charge our groceries at the supermarket, but the reality is, we don’t pay any more for them than the guy who walks in and plops a $100 bill on the counter. Plus, we do accumulate points toward miles. Frankly, it’s not something that has interested me, but my wife is far smarter than I, and she has earned several free tickets simply by charging things that ordinarily one would just pay for in cash. The caveat must be however, that you have to have the discipline, as you apparently do, to only charge those things that you can absolutely, positively, without fail, write a check for the day the bill comes. As soon as you start paying interest on this account, the viability of the idea goes right down the dumper.

Dear Bruce: My husband and I need advice. We moved to the United States three years ago from Europe and have been getting on our feet. At 47 and 48, we are seriously thinking about our retirement plans. My husband doesn’t want to lose money in stocks, and we are somewhat ignorant on the best way to invest. Thanks for guiding us to our best options. – D. & M., via e-mail

Dear D. & M.: I don’t think anybody wants to lose money in stocks – we all want to make money. Unhappily, what goes up, can and will go down from time to time. If you are employed and there is a plan such as a 401(k), 403(b), etc., available to you, by all means take advantage of it. If you’re self-employed, you should be talking to an accountant as to what you should expect. Once again, if you are employed, you are very likely contributing to our Social Security system and, other things being equal, are covered there as well. I sound very repetitive, but it is true: there are no shortcuts. You’re going to have to take and invest that commodity which is so precious – your time – and become knowledgeable about the investment possibilities.

Dear Bruce: Where can I find a pure financial planner to give me a knowledgeable review of financial standing, individual retirement accounts, long-term health care, etc. without trying to sell me annuities or some other products? I just want a professional opinion of the actions I have taken. – J.K., Melbourne, Fla.

Dear J.K.: What you are seeking is a fee-based financial planner. He or she will charge you a flat fee, which could be as much as several thousand dollars, to work out a map for you, but will never try to sell you anything. Their only income is from that fee. You can start with the trade associations in your area, such as banking or brokerage groups, and ask for a list of fee-based individuals. You will then interview them just as you would any prospective professional employee. Many will take the point of view that as long as commissions are being made, why not take advantage of their knowledge? I have no quarrel with that, but there is a place for “fee-based” opinions, and there are many professionals who can give them.

Dear Bruce: Unfortunately, my husband recently passed away, and I need to make decisions that will give me some sense of security. I work full time and contribute to a 401(k). I have no credit card debt. However, I have a car loan that I plan to pay off, and a mortgage that I cannot pay off anytime soon, even if I had the money. We recently refinanced our home loan and I will be penalized if I pay the loan in full before April 2007. My question is, should I sell my home, pay cash for another home and invest the remaining funds? I am 51 and plan to work another 15 or more years. I do not know how I will be impacted tax-wise if I have no mortgage interest to claim. At this juncture in my life, will I be better off with or without a mortgage? Additionally, I have not a clue as to what to invest in or how to become knowledgeable about investment opportunities. What should I consider before I sell my home? – C.C., via e-mail

Dear C.C.: The first thing that I would do is let the dust settle. You mentioned that your husband passed away recently, and making decisions in haste often leads to mistakes. You said that you wished to pay off your mortgage early. You might inquire of your mortgage company if the prepayment penalty is still in effect given the fact that one of the mortgage borrowers is deceased. In some cases, the prepayment penalty would not apply. It’s a question worth asking.

In general, maintaining a large mortgage just because of the tax benefit is not a good plan. You should sit down with a knowledgeable family member or a paid consultant and go over your entire financial picture. Reduce your plans to writing. In effect, you are drawing a map to get where you’re going to go. It might take six months to a year to get a clear focus. Prior to that clear focus and a written plan, your best course in my view would be to move very slowly. Best of luck.

Bruce Williams is a national radio talk show host and syndicated columnist.