Originally Posted by CoachKandSportsguy (Post 2441886)

The scenario:

They needed a small amount of money to improve the second home.
Small meaning $0-50K, exact amount uncertain. Lets use $50K for simple back of the envelope calculations

They have a substantial IRA, and live well on pensions and IRA withdrawals.

I recommended taking the amount out of the IRA.

They consulted their financial advisor, his advice was to take out a home equity line of credit. So they proceeded down that road. Cost of interest is 7%

I asked how the financial advisor was compensated. The reply was "he gets a percentage of assets under management" The advisor told them that taking money out of the IRA would require taking out the amount plus a *huge* amount for taxes."

So here is the financial trade off with simple math:

Take out $50K from IRA, plus 22% for taxes = about $61K, est $11K for taxes

vs

Take out $50K, pay about $3,500 per year in interest. After 3 years, the interest payments are approximately $10,500. The interest qualifies for tax deductibility due to loan against the property for upgrades. The interest can only be deducted if the filer itemizes, which the couple does not. Therefore the interest is not tax deductible.

Conclusion:
Keeping the home equity loan costs more in interest if the loan is held for more than three years versus the one time tax payment. The relatives did not figure that part of the equation because they trusted their financial advisor to give them unbiased, fiduciary advice.

The money manager convinced the couple to avoid removing money from his paycheck using the fear of huge taxes. . without being specific about the trade off.

Remember Charlie Munger's quip:
"Show me the incentive plan and I will show you the resulting behavior"

Never fear taxes, just remember to understand and remember to use taxes in your financial decision.

good luck out there, its a financial jungle where everyone is looking at you for a meal

Originally Posted by jasamy2 (Post 2442114)

Thank you for breaking it down so we can understand. Now can you help with rolling over a traditional IRA to a Roth? 😁. Worth paying the taxes up front now or later?

Originally Posted by Stu from NYC (Post 2442156)

Not to mention the govt could decide they needed to partially tax the Roth.

Originally Posted by goneil2024 (Post 2442271)

OP offers an interesting question, however from a practical standpoint an informed answer is not knowable unless we have all the needed information, which in my view we don’t.

All too often important financial decisions are made without knowing the total financial picture.

Originally Posted by retiredguy123 (Post 2442278)

The financial advisor's recommendation to borrow money is crazy. Don't borrow money when you have money.

Originally Posted by retiredguy123 (Post 2442278)

The financial advisor's recommendation to borrow money is crazy. Don't borrow money when you have money.

Originally Posted by Teemotay (Post 2442288)

I don’t think that applies in every case.

I thought that we should buy our house with available funds when we built 5 years ago. My advisor counseled against that because our 15 year interest rate is 2.5%. Borrow at 2.5% and invest the difference to gain 6-9% on that money. Let’s just say she didn’t have to work to convince me. Our returns under her management have been very satisfying even considering the management fee.

Originally Posted by retiredguy123 (Post 2442278)

The financial advisor's recommendation to borrow money is crazy. Don't borrow money when you have money.

Originally Posted by Bill14564 (Post 2442294)

That may be true if you have that money under your mattress but it isn't as clear if you have to pay to access the money and/or if the money is working for you where it is.

Depending on what the market decides to do, borrowing money today could result in a net *gain* of over $25K in 15 years.

Originally Posted by CoachKandSportsguy (Post 2442308)

you are basing the decision on future events repeating, which may or may not occur.
Without basing the events on future events occurring, but today's cost of money only, which would you pick? The financing decision reduces discretionary income on a fixed income, versus maintaining the current cost of lifestyle. This type of reasoning increases the cost of retirement lifestyle unnecessarily.

One can always borrow based upon pledging assets, which is called leveraging up and getting more aggressive about borrowing money. Retirement should be about deleveraging and more conservative to guarantee longevity of assets.

increasing personal risk of mandatory future payments against a personal property improvement doesn't make alot of risk management sense for a retired couple with a fixed income, who are currently enjoying their cost of lifestyle.

Originally Posted by retiredguy123 (Post 2442291)

I don't agree. I have only had one loan in my entire life, and I paid it off within 2 years. People who avoid debt almost always become wealthier than those who don't.