ROANOKE TIMES
Copyright (c) 1997, Roanoke Times
DATE: Monday, April 7, 1997 TAG: 9704070127
SECTION: MONEY PAGE: 6 EDITION: METRO
COLUMN: MONEY MATTERS
SOURCE: MAG POFF
Q: My husband and I are considering buying our first house. We've been renting apartments, living cheaply and saving diligently. Our net worth is in the neighborhood of $800,000, of which about $450,000 is in IRAs and a 401(k). The money is divided among stocks, stock mutual funds, bonds, a bond mutual fund and a conservative pension-fund mix of money-market funds and the like. We think we have the right mix for our age group (around 50).
We have no children, so we have no college expenses. We have no significant investments in real estate (outside the pension fund), and we are a bit nervous about the stock market - the sharp rise in which has much to do with our financial situation. We certainly intend to ride out any correction, but we wonder if recent rates of return can possibly continue when we baby boomers retire and start cashing out.
If we buy a house for $100,000 to $150,000, friends have advised us that we should go ahead and take out a mortgage, rather than paying for it out of our investments. They argue that we will get a better return on our money if we take the tax deduction on the mortgage interest and invest the money elsewhere.
Not only do we dislike the idea of going into debt, but also we doubt that by the time we've paid points and all that compounded interest to the bank, we'd really be better off.
Our income (and hence our tax bracket) varies considerably because my husband is self-employed, but lately our adjusted gross income has been running around $70,000 to $100,000. What ought we to do?
A: David Cissel, a certified financial planner with Financial Solutions in Roanoke, said that, as a general principal, it's a good idea to carry as little debt as possible. Cissel is a fee-only planner, meaning his charges clients for his advice rather than earning a commission from selling them a particular type of investment.
By paying cash for your home, he said, you would save a significant amount of money on interest. A 15-year conventional mortgage of $100,000 at 8 percent, for example, would require more than $70,000 in interest over the life of the loan. Even after considering the tax deductions for interest, Cissel said, the savings through avoiding the debt entirely would be significant.
As to whether you would make more money in investments than you would pay in interest, he said, no one has a crystal ball regarding future investment returns. on your behalf
By paying for your home out of your savings, Cissel said, you would be trading the uncertainty of investment returns for the certainty of savings on interest. In addition, you could use savings on the mortgage payment to add to your investment portfolio.
Cissel said you should consider the tax consequences of selling investments that have appreciated in value.
Federal estate-tax rates|
Q: My question concerns federal estate-tax rates.
In your column of Dec. 25, 1995, you quoted a certified public accountant, Fulton Galer, as saying that the beginning tax rate is 18 percent on the first $10,000 of estates above the $600,000 exemption. You said the tax rates graduate 2 percentage points for each $20,000 from there.
Several self-help legal references indicate the beginning tax rate is 37 percent on the first $10,000 above the $600,000 exemption. They go up to 55 percent on estates above $3 million.
I would appreciate clarification.
A: Fulton Galer, a tax specialist with the Roanoke firm of McLeod & Co., said the federal estate-tax tables to which you refer already exclude the $600,000, which is not subject to estate taxes.
He said the beginning tax rate on the first $10,000 above the $600,000 exclusion is 18 percent. The 37 percent rate to which you refer covers the first $600,000 above the exclusion. It actually applies to estates of $1.2 million. The 55 percent rate is levied on estates of $3.6 million. That's $3 million plus the amount which is never taxed.
LENGTH: Medium: 76 linesby CNB