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<<Please excuse me if this is an old question; I am new to the board and a rank novice at managing my money, much less investing it! But now it is time to learn. I have the ability to start a Keogh Plan but not the cash. I do have a line of bank credit at 12.5%. Should I borrow to do this? My tax rate is 35%. Your help is appreciated.>>

There's nothing illegal, improper, or even necessarily illogical about borrowing to fund a Keogh plan. And when your tax rate is 35%, the savings may be substantial. However . . .

You should be aware that the interest you pay on this borrowing is not tax-deductible. But the money you eventually pull out of the Keogh will be taxable. This creates what we call a negative tax arbitrage. Whether you like that fancy term or not, the point is that you're hurting yourself as long as that situation exists. So you should think hard before doing this. If you believe you will pay back the money you borrowed within a short period of time, the overall benefits may justify this strategy. On the other hand, if you are adding to a debt that will remain outstanding for many years the better choice may be to reduce your debt level. These are general thoughts only, and a professional with knowledge of your specific situation may be able to provide more helpful advice.

KAT in Chicagoland
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