Tax Refund Time!

[timetosave]

Good morning all. I finally got my taxes done (free at my credit union) and I am getting a combined total of 6,595 back.

1,000 to an emergency fund
489.91 to my car payment (it will get me one payment ahead)

Rest to debt!!!!!!

Q. I have a CREFF account that has about 30,000 in it. I've lost a great deal of money in this account over the last 8 years because I stayed very aggressive while the stock market was doing so poorly (I never looked at my statements and just blew it off) I have nobody to blame but myself.

I want to liquidate this account and purchase a rental property...any ideas is this a really bad idea? I'm thinking because it is a buyers market this would be the time to do it and this will give me additional income. I have state retirement as well as a Fidelity account I'm putting money into now.

thanks
G

[jIM_Ohio]

Originally Posted by timetosave

Good morning all. I finally got my taxes done (free at my credit union) and I am getting a combined total of 6,595 back.

1,000 to an emergency fund
489.91 to my car payment (it will get me one payment ahead)

Rest to debt!!!!!!

Q. I have a CREFF account that has about 30,000 in it. I've lost a great deal of money in this account over the last 8 years because I stayed very aggressive while the stock market was doing so poorly (I never looked at my statements and just blew it off) I have nobody to blame but myself.

I want to liquidate this account and purchase a rental property...any ideas is this a really bad idea? I'm thinking because it is a buyers market this would be the time to do it and this will give me additional income. I have state retirement as well as a Fidelity account I'm putting money into now.

thanks
G

If you have more than $5100 in debt and $30,000 invested, one might consider selling enough of CREFF to pay off the debt. How large is the debt? what interest rates?

[timetosave]

My debt is over 75,000. That includes student loans/car payments the rest of my debt is due to credit cards that have been written off.

I don't think that is a good idea for the CREFF account, that does not put me ahead in the long run...I need the income the rental will provide...I'm trying to find something that will produce more income - there are several rentals in the college area here that are selling at or around 30,000 - 40,000 so I would take the money purchase the rental, pay off whatever is still owend within the first year and then I can use the monies generated (all profit at this point) to pay down my debt...does that sound crazy? I have a 12 yo dd that wants to go to college, I have to do something now.

thanks
G

[jIM_Ohio]

How long do you estimate it will take to pay off the 75k in debt?

Paying for a child's education should not be high on list of priorities until the rest of the finances (retirment saving included) are in line.

Is the CREFF a mutual fund account? I was assuming this was a mutual fund position. Is this a rental property? If it's a rental, what is operating cash flow of rental?

[timetosave]

Hi, this is the breakdown

Asset Class Allocation
Equities 56.68%
Real Estate 10.41%
Guaranteed 25.03%
Fixed Income 7.89%
Total 100.00%


Thanks for your input.

G

[jIM_Ohio]

Is the 30k an asset you can sell? Is it a mutual fund?

[anonymous_saver]

"Good morning all. I finally got my taxes done (free at my credit union) and I am getting a combined total of 6,595 back."


May I make a suggestion of changing your allowances throughout the year? $6,595 is a very large amount of money to be getting back in taxes. Did you claim 0 this year with dependents and having a spouse?

Either way you should try going to http://www.irs.gov/individuals/artic...=96196,00.html in order to us the witholding calculator there. At the very least you should be claiming 1 for yourself.

Or is there a reason you wanted to get such a large tax refund at the end of the year? Why not change your allowances and get more money throughout the year that you can earn interest on your earnings?

[timetosave]

I am at 0 deductions. I like getting the money back at the end of the year not to mention I'm so afraid of owing...I understand that money could be earning interest/doing good for my family during the year but I'm not a good saver and if I spend the money as I get it and owe at the end I'm in trouble. I really like having a chunck of change to pay debt down with...makes me feel as if I've accomplished something.

[timetosave]

Originally Posted by jIM_Ohio

Is the 30k an asset you can sell? Is it a mutual fund?

Yes, this is an asset I can sell. I will, of course, lose a % of it but it seems I have to be more pro-active with the money...I'm thinking long term investing in a rental property will only help my situation.

Thanks
G

[disneysteve]

Originally Posted by timetosave

Yes, this is an asset I can sell. I will, of course, lose a % of it

What do you mean that you will "lose a % of it"? Is this a retirement account that you want to cash in early? If so, you will have to pay taxes and a 10% penalty most likely. I think that is probably a bad idea but might possibly make sense depending on your situation.

I also don't think it is a good idea to be buying a rental property when you are in so much debt. You say you need the additional income the rental property could generate, but from what you've said, it sounds like the main reason you need that income is to support your debt payments. Why not just take the money and pay off the debt. Then your current income will go a lot farther each month as you won't be spending so much on debt repayment.

As for the rental property, you say that you will have all profit. That is awfully optimistic. Don't forget that you have to pay taxes, routine maintenance, repairs, etc. Are you planning on doing all the work yourself or might you need a property manager? What happens if you have trouble finding a tenant and the place is vacant for a few months? Can you afford to carry the property on your own with no rental income?

Regarding the tax refund, as much as you like getting that big check, it is a bad thing, especially in your situation. Not only are you giving the government an interest free loan all year, but you are paying your creditors interest as well. You say you realize you need to be more proactive in managing your money. Well, change your witholding and increase your take home pay by over $500/month. Just arrange for automatic payments to your loans so that you aren't tempted to spend that money.

[autoxer]

Originally Posted by timetosave

I am at 0 deductions. I like getting the money back at the end of the year not to mention I'm so afraid of owing...I understand that money could be earning interest/doing good for my family during the year but I'm not a good saver and if I spend the money as I get it and owe at the end I'm in trouble. I really like having a chunck of change to pay debt down with...makes me feel as if I've accomplished something.

You can use the witholding calculator to make sure you don't owe at the end of the year, but you could free up >$500 per month if you adjusted your witholdings closer to your real tax liability.

What are the penalties for liquidating the CREF account?

Originally Posted by timetosave

I'm thinking long term investing in a rental property will only help my situation.

Are you prepared to be a landlord? Are you prepared to spend money on maintaining the property? Are you ready to deal with bad tenants? Will you still be able to pay the property tax and insurance bills if you have a vacancy?

[jIM_Ohio]

Originally Posted by disneysteve

What do you mean that you will "lose a % of it"? Is this a retirement account that you want to cash in early? If so, you will have to pay taxes and a 10% penalty most likely. I think that is probably a bad idea but might possibly make sense depending on your situation.

I also don't think it is a good idea to be buying a rental property when you are in so much debt. You say you need the additional income the rental property could generate, but from what you've said, it sounds like the main reason you need that income is to support your debt payments. Why not just take the money and pay off the debt. Then your current income will go a lot farther each month as you won't be spending so much on debt repayment.

As for the rental property, you say that you will have all profit. That is awfully optimistic. Don't forget that you have to pay taxes, routine maintenance, repairs, etc. Are you planning on doing all the work yourself or might you need a property manager? What happens if you have trouble finding a tenant and the place is vacant for a few months? Can you afford to carry the property on your own with no rental income?

Regarding the tax refund, as much as you like getting that big check, it is a bad thing, especially in your situation. Not only are you giving the government an interest free loan all year, but you are paying your creditors interest as well. You say you realize you need to be more proactive in managing your money. Well, change your witholding and increase your take home pay by over $500/month. Just arrange for automatic payments to your loans so that you aren't tempted to spend that money.

I am all for being a capitalist and coming out ahead. Do you know the first thing to do when you are in a hole?

STOP DIGGING.

Goal #1 needs to be "cash flow positive". Some questions:

How much of the rental property contributed to the $6500 income tax refund?

Goal #1a needs to be have a total handle on situation

In would also suggest "laying out" your whole financial picture. List each debt/interest rate/ amount owed/ minimum payment/projected date paid off.

List all investments/ assets. List account type (taxable or not). it taxable, list if holding at a gain or loss.


Goal #2 should be prioritize problems

Goal #3 is identify a short term problem and short term solution


What I see is #2 is being done without regard for 1a (and possibly #1).

You initially asked for an answer (#3) without fully disclosing #1a.

If you have 75k in debt, that is alarming. I have been 10k in CC debt 3 times in my life. First time took me ~3 years to get out, next time about 18 months and last time about 2 months to get out. Once I realized "selling out" to get out of debt is a good thing, then all other decisions became closer to common sense than a real question.

[disneysteve]

There is a saying that comes to mind:

You can't spend your way out of debt.

In other words, if you are trying to get out of debt, buying a $30,000 or $40,000 property isn't the way to do it.

[timetosave]

approx 24,000 (car)
36,000 student loans
about 7,000 credit card (not paying on any - all VERY OLD accounts that have been charged off) all recent cc's have been paid off and closed.

Thanks

G

[timetosave]

Originally Posted by disneysteve

There is a saying that comes to mind:

You can't spend your way out of debt.

In other words, if you are trying to get out of debt, buying a $30,000 or $40,000 property isn't the way to do it.

Though getting out of debt is a priority...it is not my first priority...I have to start saving for dd's education...my car loan/student loans are not hurting me right now (I'm caught up on both and have those under control)

I am looking ahead...being debt free is great but if I only have my income dd won't have a chance of going to college...I need additional income...

Thanks
G

[jIM_Ohio]

Originally Posted by timetosave

approx 24,000 (car)
36,000 student loans
about 7,000 credit card (not paying on any - all VERY OLD accounts that have been charged off) all recent cc's have been paid off and closed.

Thanks

G

OK this changes the solution somewhat.

Pay off the 7k now. You have an income tax return. 100% of this goes to old debt... car is not the problem.

24k car is probably a higher interest rate than 36k student loans. Guessing based on experience... Whichever has the higher rate, I'd pay that off. factoring in the student loans are tax deductable (to a point), I would work on the car. 6% is a reasonable return... more than most savings accounts and less risk than stocks.

You cannot afford to be getting a 6k tax return with 24k of car debt. You are giving the government free money, and it's costing you whatever interest rate you are paying on the car (6%?). Adjust withholdings to give you an extra $200/month for car. Depending on how long the loan is for, this should pay off car 1-2 years sooner. This will be a 6% immediate return on your decision (or whatever interest rate you are paying on the car).

There is $300/month extra from withholdings. If you want to spend some of this, I could see merit to that. I would then set up an automatic deduction to an IRA (Roth is the suggestion). $200/month to Roth and $100/month to spend sounds reasonable. If you are worried about spending the money, use the 7k tax return to open a new bank account. Adjust your withholding allowances to get the $500/month into your paycheck into this account. Might want to add in amount of car payment too. Then send $500 from each paycheck to this new bank account. DO NOT get debit or ATM card for this account. Once account has $7500 in it (tax refund+one months pay) pay off the credit card. Then next month, set up so the car payment+$200 is deducted from account automatically. And the Roth IRA is set up to come out of this account automatically.

This assumes the rental is cash flow positive. If the rental unit is NOT cash flow positive, dump it, or invest $300/month into it to make it cash flow positive. Assuming you know enough about taxes, are you depreciating the rental for a tax deduction? A you deducting the interest and taxes for the rental? If you are not, seek a tax professional or dump the rental.

I don't see the student loan debt as a major issue... but getting cash flow positive on the rental to me is priority 2 after paying off old CC debt (priority 1).

[autoxer]

Originally Posted by timetosave

Though getting out of debt is a priority...it is not my first priority...I have to start saving for dd's education...my car loan/student loans are not hurting me right now (I'm caught up on both and have those under control)

I am looking ahead...being debt free is great but if I only have my income dd won't have a chance of going to college...I need additional income...

Thanks
G

You want to start saving for dd's education while you have $36k in student loans. And you want to liquidate a retirement account to buy a rental property for extra income so you can save for dd's education?

dd can always borrow money to go to school, but you can't borrow money to retire.

[jIM_Ohio]

Originally Posted by autoxer

You want to start saving for dd's education while you have $36k in student loans. And you want to liquidate a retirement account to buy a rental property for extra income so you can save for dd's education?

dd can always borrow money to go to school, but you can't borrow money to retire.

I agree with this... I am not sure the retirement account was what would be liquidated.

OP needs to give a more complete single post disclosure of what is where (as far as what a CREFF acount is, how long car payoff is, and what interest rate is on the car).

OP appears to be making "emotional" decisions. "I want this." "I want this too." With regards to rental and child's education. But is overlooking how much the 6k income tax refund is costing him (she'll pay taxes on the 6k next year, and he's paying 3-6% for the car above what he "paid" for it.)

She could make her money work for herself more than it is now.

[creditcardfree]

Originally Posted by jIM_Ohio

OP appears to be making "emotional" decisions. "I want this." "I want this too." With regards to rental and child's education. But is overlooking how much the 6k income tax refund is costing him (he'll pay taxes on the 6k next year, and he's paying 3-6% for the car above what he "paid" for it.)

Oh, you can say that again. Time to save is a woman. She has posted here before.

I'm glad to see you are finally getting ahead on your car payment with this tax refund. I know it has been a problem for you since August. I also think that it's great that you are putting the remainder to debt.

I absolutely would not pull money out of a retirement account to buy rental property to fund my daughter's education. Even if it is not a retirement account, I think you have enough on your plate without being a landlord.

The main thing you should consider since the account is not doing well, is finding a different investment to put the money in...where it can grow at a faster rate without a lot of time on your part. If it is a retirement account, it can be transfer to another mutual fund at another company with no tax implications. What kind of account is it? Is in in an annuity with a back end fee?

Don't do anything without getting all the information just because you are desparate. Your daughter will go to college regardless if you have the money saved. People do it everyday. Think scholarships, student loans, she can work and you can work to get it done when that day comes.

Right now you need to handle your own finances...so you can be an excellent example to her. Nice to see you back. Sorry I can't be supportive in your property endeavor.