Home equity loan can help with new business
Q: I am a 59-year-old woman with no consumer debt and with a house worth $425,000 that is paid off. I plan to start a new career/business in 2005 and will not have a regular day job. I expect 2005 to be a lean income year. I also need a new roof and have budgeted $15,000 from my savings.
My new financial planner has suggested I take out an interest-only home equity loan/line of credit. I will need at least $1,400 a month for the coming year. If I don't take out the loan, I will dip into my $46,000 savings or sell various stocks to help the cash flow. (I would not want to dip into my IRA money yet.)
I think this is good advice, but I am still a little nervous about monthly debt, even if it is only $100 a month. I do plan to sell my current home in 2006 or 2007, so I could easily pay off my loan.
What do you think?
_ Name withheld by request
A: I think your financial planner is right on track. I hate home equity loans when the proceeds are spent on consumer purchases, such as cars or vacations, but using money to start your own business may make for a great investment. In fact, investing in your own business may provide a much higher return than any other investments you own.
To keep costs low and provide greater flexibility, you might look at a home equity line of credit rather than a home equity loan. With a line of credit, you borrow money only when you need it, whereas a home equity loan will distribute a sum of cash at the get-go.
To keep your retirement intact, determine in advance how much money you are willing to spend before your business is profitable. I've seen too many people who kept plowing money into unprofitable businesses, which caused them to go broke right before retirement. If your business isn't profitable by the time you run through your budgeted cash, it may be wise to throw in the towel while your finances are still in good shape.
Q: I have three IRAs with my wife as beneficiary. Now that we are both at retirement age, would it be possible to list her as co-owner with me so she would not have to go through the system in case of my death? If not, what is the best way to handle it so she would have quick access to the money after my death?
_ Pete
A: You can't have your wife listed as a co-owner of your IRAs unless you withdraw your entire account balances and put the proceeds in a joint account. Cashing in your IRAs would result in a killer tax bill, which would negate any benefits achieved by the joint account.
Retirement accounts, such as 401(k)s, 457s, Keoghs, cash balance plans, defined benefit pension plans, etc., must be owned by an individual. Joint ownership of retirement plans is not permitted.
Fortunately, there is a simple way for you to ensure your spouse receives all of your retirement accounts at your death: List your wife as the primary beneficiary on your accounts. If you die before she does, she can convert your IRAs into her own IRAs without any taxes or hassles. All she would need to do is present a death certificate to the custodian, and the plan would be changed to her name within a couple of days.
Q: If a person had $10,000 they wanted to put somewhere and gain some money but also be able to access it in an emergency or just down the road, what would be the best option? I tried the bank route, and my banker suggested annuities. I wasn't sure the advice was in my interest or the bank's, however. I considered stocks, but I don't know anything about them.
_ G.W.
A: With investments, you can't have your cake and eat it, too. Most people want an investment that has a high return in a short period of time with no risk. Obviously, those types of investments don't exist.
If you want an investment that you can tap into in the near future, an annuity is a terrible option. Fixed annuities offer stable accounts, but they cannot be accessed without triggering a tax bill. Furthermore, most annuities carry hefty surrender penalties if they are cashed in within the first five to seven years.
If your goal is to have some cash reserves that you can get at if an emergency arises, you should probably just stick with a bank money market account. You won't earn much money, but you'll have the assurance that the money will be there if and when you need it. Only when you have enough emergency reserves set aside should you look at other investment options, such as annuities or stocks.
My new financial planner has suggested I take out an interest-only home equity loan/line of credit. I will need at least $1,400 a month for the coming year. If I don't take out the loan, I will dip into my $46,000 savings or sell various stocks to help the cash flow. (I would not want to dip into my IRA money yet.)
I think this is good advice, but I am still a little nervous about monthly debt, even if it is only $100 a month. I do plan to sell my current home in 2006 or 2007, so I could easily pay off my loan.
What do you think?
_ Name withheld by request
A: I think your financial planner is right on track. I hate home equity loans when the proceeds are spent on consumer purchases, such as cars or vacations, but using money to start your own business may make for a great investment. In fact, investing in your own business may provide a much higher return than any other investments you own.
To keep costs low and provide greater flexibility, you might look at a home equity line of credit rather than a home equity loan. With a line of credit, you borrow money only when you need it, whereas a home equity loan will distribute a sum of cash at the get-go.
To keep your retirement intact, determine in advance how much money you are willing to spend before your business is profitable. I've seen too many people who kept plowing money into unprofitable businesses, which caused them to go broke right before retirement. If your business isn't profitable by the time you run through your budgeted cash, it may be wise to throw in the towel while your finances are still in good shape.
Q: I have three IRAs with my wife as beneficiary. Now that we are both at retirement age, would it be possible to list her as co-owner with me so she would not have to go through the system in case of my death? If not, what is the best way to handle it so she would have quick access to the money after my death?
_ Pete
A: You can't have your wife listed as a co-owner of your IRAs unless you withdraw your entire account balances and put the proceeds in a joint account. Cashing in your IRAs would result in a killer tax bill, which would negate any benefits achieved by the joint account.
Retirement accounts, such as 401(k)s, 457s, Keoghs, cash balance plans, defined benefit pension plans, etc., must be owned by an individual. Joint ownership of retirement plans is not permitted.
Fortunately, there is a simple way for you to ensure your spouse receives all of your retirement accounts at your death: List your wife as the primary beneficiary on your accounts. If you die before she does, she can convert your IRAs into her own IRAs without any taxes or hassles. All she would need to do is present a death certificate to the custodian, and the plan would be changed to her name within a couple of days.
Q: If a person had $10,000 they wanted to put somewhere and gain some money but also be able to access it in an emergency or just down the road, what would be the best option? I tried the bank route, and my banker suggested annuities. I wasn't sure the advice was in my interest or the bank's, however. I considered stocks, but I don't know anything about them.
_ G.W.
A: With investments, you can't have your cake and eat it, too. Most people want an investment that has a high return in a short period of time with no risk. Obviously, those types of investments don't exist.
If you want an investment that you can tap into in the near future, an annuity is a terrible option. Fixed annuities offer stable accounts, but they cannot be accessed without triggering a tax bill. Furthermore, most annuities carry hefty surrender penalties if they are cashed in within the first five to seven years.
If your goal is to have some cash reserves that you can get at if an emergency arises, you should probably just stick with a bank money market account. You won't earn much money, but you'll have the assurance that the money will be there if and when you need it. Only when you have enough emergency reserves set aside should you look at other investment options, such as annuities or stocks.
posted by Kirby P at 5:03 PM
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