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Interest deduction not cutting income tax bill much. Start putting extra money into retirement portfolio
Published on Monday, Mar 10, 2008
Q: I read your article Hard Work Doesn't Pay on msn.com, and I agree. I also believe Corporate America will use you, abuse you and show you the door when they are done with you.
That makes me wonder about paying off debt. I'll be 59 years old in August. I make $100,000-plus today, but who knows about tomorrow? Over the last three years, I have been making my mortgage payments plus additional principal. Doing that, I have saved nearly 17 years of interest payments at 6 percent. Today the balance is down to less than $30,000.
Should I continue this? The only reason not to, I think, is the $3,400 interest write-off at the end of the year. In the next year or two I see myself dropping my income down to $20,000 or $30,000 a year. That would be a semiretirement.
Should I continue to make the $1,200-plus mortgage payments? Or should I just make the monthly payment and continue to take the interest write-off? — C.S., by e-mail
A: Pay off the mortgage ASAP. Then start putting the extra money into your retirement portfolio. While you may have $3,400 of interest to deduct each year — plus the real estate tax deduction — the deductions probably aren't doing much to reduce your income tax bill.
Remember, itemized deductions must exceed the standard deduction before they bring any reduction in your income tax bill. So they have to exceed $5,450 for 2008 if you are single or $10,900 if you are married. If you are married and live in a no-income tax state like Texas, odds are there is no tax benefit for making interest payments on a mortgage. Furthermore, when you go into semiretirement, you'll find yourself in a low tax bracket with no tax benefit for a 5 percent or 6 percent mortgage rate. Meanwhile, your savings may only be earning 3 percent or 4 percent.
Bottom line: This is a very good time to be whacking down any debt you have.
Q: I am 72. My husband is 79. I am dismayed by the last three months in our brokerage accounts, particularly after such a good month in October. We each have an IRA account. Mine is worth about $149,000, and his is worth about $225,000. We also have a joint account worth about $242,000. All three accounts are invested in mutual funds.
Should we consider purchasing an annuity (variable or fixed)? If so, can we take some money from both IRA pots and leave the joint pot for any near-term emergencies? We owe $38,000 on our comfortable small home in a retirement/resort-style community. We have a revocable living trust and no credit card debt. — P.R., Seattle
A: Your instincts are very good. I don't know anyone who has enjoyed examining their account statements for November, December or January. So it's important that you think more about how your money is invested than who it is invested with.
That's why I think your idea of purchasing an annuity — a fixed annuity — may be a really good way to reduce the ups and downs of your assets. A variable annuity won't solve the problem of market ups and downs. Remember, a variable annuity is only a legal wrapper for mutual funds that endows them with tax deferral. The assets inside the wrapper will still go up and down, just as your mutual funds do.
But at ages 72 and 79, you can increase your income materially by using some of your money to buy life annuities. You can scope out the possible range of payments by visiting a Web site like http://www.immediateannuities.com. While the life annuity means you have exchanged your principal for a lifetime income, it also means you'll worry less about the markets. Better still, by increasing your current income through the life annuities, you'll have less need for income from your mutual fund assets.
Another very good step you should take is to pay off your $38,000 home mortgage. The annual payments are probably quite high as a percentage of the amount owed, so paying it off would be another step toward reducing your cash needs and vulnerability to market swings.
Questions about personal finance and investments may be sent by e-mail to scott@scottburns.com or by fax to 505-424-0938. Check the Web site: http://www.scottburns.com. Questions of general interest will be answered in future columns.
Q: I read your article Hard Work Doesn't Pay on msn.com, and I agree. I also believe Corporate America will use you, abuse you and show you the door when they are done with you.
Get the full article here.
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