I messed up! Despite trying to make this article as fact-based as possible, I botched it. I've made corrections but if you read the comments, early responses may be confusing in light of my changes.
For the most part, the world of personal finance is calm and collected. There's not a lot of bickering. Writers (and readers) agree on most concepts and most solutions. And when we do disagree, it's generally because we're coming from different places.
Take getting out of debt, for instance. This is one of those topics where people do disagree -- but they disagree politely.
My friend Amy recently wrote with an interesting dilemma. "Should I pay off my mortgage early?" she wonders.
Amy has a high-paying job and has managed to save enough that she could be completely debt-free if she wanted to. And she kind of wants to! But is this the best choice? She's aware that this is a nice problem to have — but it's still a bit of a muddle. She'd like some guidance.
Here's an abridged version of her email:
I'm wondering if you have any advice for me related to paying off a mortgage vs. keeping it for tax purposes.
Here’s the basic rundown: I have 22 years and $103,000 left on a 30-year fixed-rate mortgage at 3.95%. My monthly payment is $668 per month. I will pay about $48000 in interest this year. I pay both my taxes and insurance out of pocket annually.
The past two years, I've made close to a quarter of a million dollars each year, and this year I will likely exceed that amount. This is a wonderful place to be. With no other debt, I'm contemplating whether I should completely pay off my mortgage in one swoop come November when I get my bonus.
I have advice coming from both sides. My accountant warns me against it, as I would have no other write-offs to offset my high income. However the freedom of being DEBT FREE sounds amazing, even if it comes with a high tax bill.
I would love your advice (or the advice of your readers, if this offers an opportunity to share with them).
My stock answer to this question -- which I get a lot -- has always been: This is a no-lose situation. Deciding whether you should pay off your house is a case where either option is awesome.
Mathematically (and financially), the best choice is almost always to carry the mortgage. However, many people receive a huge psychological boost from not having a mortgage. In other words, this is one of those situations where the smart financial decision and the smart psychological decision aren't necessarily the same.
Although Amy is asking specifically about the tax implications, let's start by examining the Big Picture.
The Pros and Cons to Paying Off Your Mortgage
Just so everyone is on the same page, here's a quick look at the pros and cons to paying off your mortgage. There are advantages and disadvantages to both choices. Are certain advantages more important than others? You make the call.
Looking to save versus spend? Eager to sock money away not just for a rainy day but potentially for stormy months, even years, ahead?
Consider heading to the Heartland.
The Midwest is home to some of the very best places to save money and get ahead in the U.S., according to a new analysis by Get Rich Slowly.
What else not to do: Don't name your estate as your IRA beneficiary (also important to note: if you DON'T name a beneficiary, your estate becomes the default). Typically, nonspouse beneficiaries who inherit a traditional IRA can either liquidate and pay taxes on those assets within five years of the owner's death, or take the so-called "stretch option" and stretch the required minimum distributions out over their own lifetime. This could amount to thousands of dollars of lost growth. On top of that, if the IRA becomes part of your estate and enters probate, it can be accessed by creditors.
Has anyone seen that form? Do you know where your IRA beneficiary form is? Don't assume it's easily accessible from your broker or bank, because with all the mergers and acquisitions over the last decade, paperwork may have become lost in the shuffle. So, find that piece of paper -- and all your important financial documents -- and secure them. Then, tell your attorney and your family members where you have stored them.
Inheriting an IRA as a Spouse
According to the IRS, if you inherit a traditional IRA from your spouse, you generally have the following three choices. You can:
A little known tax credit can help you save for retirement, even if you feel you don't have the money to do so.
The formal name is the Retirement Savings Contributions Credit. Most people, however, know it simply as the Saver's Credit, a two-timing savings strategy that reduces taxes and increases retirement.
“No more pencils, no more books, no more teachers' dirty looks.” And for many parents, no more child care for eight hours a day. Summertime — every child's dream season — can be every working parent's nightmare.
Think about it: From late August or early September through mid-June, working parents have the luxury of public education to make sure their children are cared for, watched over, intellectually stimulated and exercised. Yes, it's education. Yes, your taxes pay for it. But it's also child care (and up to two meals a day).
As any working parent who played the house of cards known as child care when the kids were too young for school knows, it takes tremendous time, effort and lots of money to make sure your child is cared for — well cared for — while you are at work. And it eats a significant chunk of your pay.
Oh, 2015, where did you go? It seems only moments ago it was time for New Year's resolutions, and now here we are again. With only a month left before another year is behind us, you may be wondering how best to maximize this year's finances. Well, look no further!
1. Prepare for taxes.
Hopefully, you've already started to put the year-end tax-planning 2015 checklist to good use. But here's another item: If you pay taxes quarterly, make sure you send in that final payment -- and, ideally, save a little bit extra if you think you might owe. (It seems like I always end up owing just a little more than I projected.)<
[This is the third installment in a series examining repaying student loans. Part I was a best practices guide for repaying student loans. Part II discussed an alternative payment plan, Revised Pay As You Earn or REPAYE.]
In my last post on REPAYE, the new student loan repayment program, I mentioned that it might be possible to artificially lower your adjusted gross income (AGI) in order to lower your required monthly payments under REPAYE.
Staying on top of IRS tax changes is a challenge. Don't you feel sometimes like income tax is the hardest subject in the world to understand? Well, it's really nothing to be embarrassed about. Here's what Albert Einstein said way back when:
"The hardest thing in the world to understand is income taxes." - Albert Einstein Continue reading...
Know your taxes! I am a big fan of the philosophy: No one cares more about your money than you do. Even if a professional prepares your taxes every year, learn to do it yourself. Aside from what you'll save in fees, here are two benefits of learning to prepare your taxes yourself:
- By doing your taxes on your own, you can learn quite a bit about your finances and get a lot of ideas on how to make your money work more for you.
- Sometimes a professional might not ask the right question because they don't know everything that went on in your life this year. If you learn to prepare your taxes yourself, you will become more aware if a professional is missing any deductions.
Educate yourself. This is an excellent place to start — IRS tax tips.
If a professional prepares your taxes…
Set up a meeting with your accountant/tax adviser.