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Author: joelxwil Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76883  
Subject: Re: idea in article in wall st journal Date: 9/16/2005 1:35 PM
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Here is the way to look at it. Assume you take out a $300,000 mortgage, and so you have that much in a savings account. You want to live of something like $80,000 before taxes. Given a life expectancy of 10 years, you take 1/10th of the $300,000 per year. So now you only have to take out $50,000 from your IRA each year in order to get your $80000 per year on which to live. Assume it is an interest only loan at 6%, so you are paying $18,000/year. This reduces your tax basis to $50,000 - 18000 = $32000/year.

So at 15% you pay $4800/year in taxes to the Federal government. If you took out $80,000/year you would pay more - the rate is probably greater than 15%, but even at 15% it comes to $12,000 in taxes.

To avoid paying $12,000 in taxes you are paying $18,000 in interest plus $4800 in taxes. Does not sound like a winner to me.

However, don't forget that you have not take $30,000 per year from your IRA. Over 10 years, this comes to $300000 plus whatever you earn in your IRA. That could be substantial.

But wait! You were only going to live for 10 years. So what good is that additional money in the IRA?

Further complication: Your net after taxes and interest if you borrow is $80,000 - 18,000 - 4,800 = $57,200, whereas if you do not borrow the money, you would have $80000 - 4800 = $75,200. Now if you can live on $57,200 after taxes, then you don't have to take $80,000 in the non-borrowing case. So the proper comparison is to look at after tax income in both cases, and make them equal. But I have to go to lunch.

Just to make things more interesting, none of the above analysis includes the money you would make on interest from the proceeds of the borrowing. Of course, that might be taxable.

See how complicated this stuff is? I feel sure I have underestimated the tax on the $80,000, but somebody else can fix that.

I just hope I got the arithmetic right.

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