VERTIGO II: YEE-GADS!
☞ Oh . . . my. Take a few minutes to enjoy not being there.
WHEN ACCEPTABLY TO SPLIT INFINITIVES
Those who split hairs rarely split infinitives. But is it not preferable to split them when meaning would otherwise be compromised? As in: “The goal is not to let the banks fail.” That’s fine if you plan to follow up with something like, “Rather, the goal is to let the department stores fail.” But chances are what you really mean is: “The goal is to not let the banks fail.” And I see no way around splitting that infinitive. It is the sort of transgression up with which I gladly put.
MORTGAGE THE HOUSE TO CONVERT TO A ROTH IRA?
Paul Kroger: “What do you think of this strategy? We own our home free and clear, expect to stay here at least 15 years; are retired with a fixed pension that can meet most of our needs; have traditional IRA assets equal to about 33% of what we can borrow at 4.5% for 30 years; and expect inflation and/or tax rates will substantially increase when the country has no choice but to deal with its deficit/debt problems. The strategy is to mortgage the house and use the proceeds to pay the taxes due on converting IRA assets to a Roth over a number of years. Dedicating about 20% of my pension to paying off a mortgage is a partial hedge against inflation (our biggest exposure), while eliminating significant future tax exposure (a close second).”
☞ It makes sense to me, especially as – if I read you right – you’d need to borrow only a small fraction of the equity in your home. (If the IRA equals a third of your borrowing power, then the tax due on the conversion would likely be less than a third of that – maybe 10% of your borrowing power, and thus an even lower percentage of your home equity.)
A quibble and then some cautions. The quibble is your saying “paying off a mortgage is a partial hedge against inflation.” Of course, it’s the taking of a fixed-rate mortgage that’s the hedge against inflation, not the paying it off. Now, herewith, the cautions:
It’s possible of course that tax rates will fall rather than rise – that we’ll raise government revenue some different way, like a Value Added Tax or the cap and trade “tax” referenced yesterday, such that income tax brackets are lower, not higher, when you go to withdraw money from your Roth IRA.
And it’s possible your Roth IRA will depreciate rather than appreciate – so you would wind up having paid tax on more than you got to withdraw.
I don’t think either of these is likely, but you never know.
It’s also possible that your Roth IRA, while not depreciating, will grow at less than the rate of interest on the mortgage (even after shaving that rate to reflect the value of the mortgage interest tax deduction). Why borrow at 4% to earn 2%, say?
The biggest risk may be that you borrow more than you need to do the Roth conversion – well, it’s so tempting, isn’t it? – and spend or lose the excess in some colorful but ultimately depressing way.
Pending wiser comments from other readers, though, I think I’d go ahead with this if I were you. Roth IRAs offer a degree of flexibility and simplicity traditional IRAs do not.
Quote of the Day
Every debt is ultimately paid, if not by the debtor, then eventually by the creditor.~Jim Grant
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