All Forum Posts by: Daniel Murphy

This is a tough decision. In my experience, you both want to have a deep discussion(s) about your end goal and hopes for the RE investing. As well as what your expectations are of day-to-day / short-term goals.  From my personal experience, I would dedicate a semi-annual (or other REGULAR intervals) to revisit these goals. 

Goals & expectations are great, but they rarely jive with reality.  Meaning, your balance may be way better or way worse than expected.  

I spent ~10 years building up a business & lifestyle that allowed me a lot more personal freedom for that work/life balance.  Unfortunately, my (ex) wife didn't jive with the same expectations. 

Now that I'm in my early 40s with teenagers, I absolutely love having the increased flexibility to drive them to school, be present mid-day for anything or just having the overall flexibility to be present for who ever needs me, whenever they need me. Looking back though, I could have taken my foot off of the gas earlier.  Worked less hours & would potentially had the same outcome, but possibly a few years later than I expected. But also possibly not dealing with a blended family either. 

All this is to say. Be intentional. Be open to hearing your future wife's concerns, both spoken & unspoken. And be prepared that both of your goals & expectations will likely change along the way. 

If you have a faith based background, you may want to consider a healthcare sharing option.  Samaratins Ministries, Christian Healthcare Ministries or Medi-Share. 

These are definitely "outside of the box" options but they work great for people in the right scenario. We have a family of 6 & pay around $600 / mo.  Plus we've literally racked up tens of thousands of dollars on our credit card (generating rewards) in recent years.  All paid for through our health sharing plan. 

First of all, congrats on putting yourself in such a positive financial position! Second, since you are new to real estate, realize that these recommendations (and your needs) will shift with time as you gain more knowledge & comfort.  

Generally, I would not recommend you to pay your house off quicker than anticipated. Especially if you're on this forum, you are likely interested in buying more real estate.  

Based on your post, My guess is that you have ample reserves set aside in the high yield savings.  Generally, I would recommend 

1) save enough in your company plan to get your employer match (free money)

2) next save enough to max out your Roth if you still qualify.  (note - I would NOT do a backdoor Roth conversion unless you have someone deeply review your income/tax situation)

3-4 months of emergency reserves should be sufficient.  As you gain more knowledge / experience, you will likely want to adjust this. Too much cash = potentially losing out on investing opportunities.  Too little cash = possibly exposing yourself to a surprise when something needs repairs.  

As you build up various financial "buckets", you can normally scale down your savings amount as you have access to other funds in emergencies (401k loan, home equity line of credit or other short term debt options).

If you're building up all of these & still have cash leftover, I would consider a taxable brokerage account & using a broad based index fund.  The market is depressed right now. If you don't plan to move or buy another property for a year or more, you could put yourself in a good position by buying stocks that are low.  

Saving for retirement is mostly just a fancy way of saying "I'm buying some assets".  For most of us, we buy stock market investments for a number of reasons.  For Real Estate investors, you're buying assets as well. So you are still "saving for retirement" by growing your real estate portfolio. 

Personally, I wouldn't shy away from the stock market because of the current funk it's in. It will always be there. Investments will grow long term. The stock market plays it's role for certain.  Real Estate investors are a different animal from most other investors though... 

The first thing to clarify is that the lump sum is not necessarily taxable. It is only taxable if you take the lump sum & deposit it into your checking / savings account. You can roll the lump sum into another qualified plan (IRA, 401k, 403b) and this will not be taxable to you.

The second thing to understand is that all of these pension options are (semi) custom to you, & based on complicated actuarial assumptions.  

The first step I normally take is run a "market rate" comparison of the lump sum offer.  IE- let's say they want to offer you $500 / mo payment, or a $100k lump sum.  I shop rates from a handful of insurance carriers for an immediate annuity or a deferred annuity (trying to make an apples to apples comparison to your offer).  This tells me how your pension buyout offer compares to what you could find on the open market.  

Think, if they are offering you $500 / mo or a $100k lump sum, but we find that you would have to give an insurance company $125k in order to receive that same $500 / mo income, you know that the lump sum offer from your employer is strong.  (I hope this makes sense)

From here, you really want to factor in all of the decisions through your current finances and your future plans. This is where you'd really want to talk to someone about your overall finances more.  There are pro's & cons to all options that are all highly dependent on your financial situation. 

I'm happy to answer any of your questions further if you'd like to dm me. 

You should have no issue at all.  If it is a retirement account, hopefully it's not in CD's or a money market for your sake.  Either way, you'd be covered if the bank went under. 

Bank deposits are covered up to $250k.  If it is in a retirement account, and invested into the market you're covered also because you own the underlying securities.  For example, if your retirement account was $25k invested into the Vanguard Total Stock Market.  You own that. You own shares of the underlying companies.  If the bank went under, you still own shares of Vanguard, & the bank going under would not affect you.  Financially... 

Like others have said, stick with where you're at.  

A few questions. When you say back door roths, do you mean contributing to a non deductible IRA? Are you converting them now, or plan to do so in the future? If you're converting them now, you may want to consider waiting until retirement or lower taxable years to do this.

Like others have said, real estate is likely going to be your best bet for tax deductions. You could start a business & use that for tax writeoffs, but why not focus on what you already know? You could consider going the short term rental > material participate > STR loophole route. But chances are you may be too busy to do all of that.

Syndications can definitely improve your taxes. Many syndications seem to do cost seg studies & pass on the bonus deprecation to investors. This will provide you with more tax deductions, but it comes at a cost later.  

A good friend ran into one of these IPO windfall events & the best option he found was real estate. 

CPA's can tend to think about your current tax filing status, less so on the long term status. The financial planners you're talking to sound like dually registered planners, they offer fee for advice plus commissions. You may want to consider a fee only planner.  We don't have any products nor get paid any commissions.  We get paid either by consulting contracts, or assets under management & have no products to offer.  

All in all, it's hard to beat real estate for all you're asking for. Tax deductions, future cash flow etc.  You may want to look into building, developing or something with relatively high up front costs. Something that would offer a fair amount of up front write offs.  

Decisions like this are  normally a mix of what you want to accomplish with what you're comfortable with.  

First, look at your most recent tax return & see if you itemized your deductions.  If you did, your mortgage interest is tax deductible.  Take your marginal tax rate (usually listed on one of the first few pages of your tax return) & subtract it from 1.  (1-22%) = .88, now multiply this against your mortgage rate & you have your After Tax mortgage rate. Example - (1-22%)*5.5% (mortgage interest rate) = 4.84% (in this case).  

Now at least you have a number you can use to make decisions.  if you think you could invest elsewhere & make more than 4.84%, you now have data that you can actually use to make a decision. 

Like others have said, paying down the mortgage would be the "safest" option. One of the downsides of this is now you've lost accessibility and easy control of your money. Yes, you can setup a heloc like you mentioned, but now you're paying fees & interest (variable most likely) to have access to your money to invest into RE. This to me seems like a lot of work to end up in kind of the same situation as you started, having a variable rate loan. I'm not saying this is bad, it's definitely the "safest" and most "mentally comfortable" decision. 

You could also invest in the market like Charles mentioned.  The Margin loan is actually a great idea and it allows you to retain accessability and control of the funds.  Depending on what company your advisor is with, the margin rate will vary. And in all likelihood, your advisor may not even know.  This is one of those strategies that aren't on the "first line" of thinking for most advisors.  So they may not see the idea immediately.  
If they are with a large firm, they may have significant buying power with the custodian & get favorable margin rates.  The benefit of this strategy is that you retain complete control of the investments.  

IE - depending on your tax situation, you can cash out money as needed. You can realize capital gains & losses in a tax-advantaged way.  Among other benefits.  

To be clear, I would ask your advisor about these strategies (somewhat vaguely) to see what their reaction is. You can gauge how knowledgeable & comfortable they are with this idea based on their reaction. 

I agree with @Chris Seveney, tell your dad to look into a HECM reverse mortgage. At least to rule another option out before you pursue the "nuclear option" of selling his long time home.  

The downside is I believe you need to be 62 before you can do a reverse mortgage. The fees are higher than a conventional mortgage and he will have to go through some financial counseling most likely.  But it gives him an option to either stop with his payments, get a line of credit or a chunk of cash.  It may not be enough to pay everything, but it's woth looking at.  

Unfortunately for W2 employees, there are only so many ways you can lower your taxes.  

Look at Schedule A, itemized deductions. You'll see that you basically get to deduct medical expenses (very few have enough medical expenses to be deductible), State & local taxes, mortgage interest & gifts to charity. 

If you aren't maxing out all of this stuff, that is the easiest first step. 

The much more complicated (but more beneficial option) is to look for rental real estate, or self employment opportunities. Like others have mentioned, if you buy some RE, do a cost segregation study and meet the qualifications you can offset some of your income with accelerated depreciation. But this only helps for one year, not a long term fix. 

You could start a business & find ways to expense things to lower the income, but this will likely only help so far. 

Real Estate is going to be your best bet to find additional tax deductions.