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Retirement Discussions / Retire Early Liberal Edition
|Subject: Re: Paying for Cars with Cash||Date: 8/9/2007 9:19 AM|
|Author: readyteddy||Number: 9310 of 95692|
I do whatever is financially better. For example, if they'll give me a 1.99% loan, I would keep my cash in my money market before I would pay cash for a car.
I agree that's a smart way to go. I don't dork around that much trying to arbitrage interest rates anymore because the spreads aren't big enough to mess with and I really don't need the money, but I used to do my conventional IRAs with borrowed money.
Back in the day, I had a bank line of credit at 10%. Sounds harsh, but this was back when (a) You could deduct interest other than mortgages, and (b)I could get a CD paying 12% ...who remembers Paul Volker?
Anywhoo, the deal would work like this:
April 14, borrow 2000 at 10% (7% after tax) and buy a CD paying 12% in a tax deferred IRA
April 15, file tax return with $2K IRA deduction, thus buying a $600 tax savings off the top.
When the tax refund came, I would apply it to the loan and pay off the rest over 12 months - then I'd do it again!
When you think about it, that first year I was putting up $1400 and getting back $600 + 5% of two grand. Actually, it was better than that if you sweat the time value of money and all that.
Whenever the $2000 was paid off, as soon as the CD matured I would roll the money into a good mutual fund. In those days it was Peter Lynch at Fidelity Magellan.
This game went on for five years, then they changed the ability to write off the interest on the bank loan and my employer got a 401K that I maxed out so I couldn't do deductable IRA contributions any more.
I still have the IRA account. I put $10,000 in it ($7000 after tax). As of yesterday's close, the balance was $150,181.12. Easiest money I ever made in my life.
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