[dmarbell]

This is a great site. Everyone, so far, has been great at discussing my new hobby which I really know nothing about. I thought I'd share a little information from my side of the aisle, which might help someone out.

Some retirees or pre-retirees over 59 1/2 have qualified plan balances that they don't use for everyday living expenses. Wouldn't it be nice if you could use that money to buy a gun? But you can't use IRA money to buy personal stuff without paying tax on it, right? Maybe, maybe not.

You have to be in the following position: you have to be itemizing deductions, or have itemized deductions equal to about what the standard deduction is. You have to be making less than the amount that will cause you to start losing itemized deductions. You know who you are. You have to not be in Alt Min tax, you'll also know. You have to have equity in your house and an equity line or the ability to set up one. There's also a narrow tax bracket where you will create additional social security taxable income, and not break even, but that's a difficult calculation.

Since it's tax time, I thought it'd be a good time to bring all this up.

This is an extreme example. Your mileage may vary. Assume your IRA is earning 6% for purposes here.

You use your equity line, with a 6% interest only rate, to buy a $10,000 gun. It costs $50.00 per month in interest. You take an additional $50.00 per month out of your IRA. The IRA distribution is taxable, the mortgage interest is deductible. You have no tax on the IRA distribution.

(This is the extreme part.) If you sell the gun for $10,000, you pay off the equity line. You basically used the $10,000 IRA money to use the gun for whatever period of time. You used the 6% earned on $10,000 of your IRA to pay the 6% interest expense.

If you could have bought the gun inside your IRA, you would have lost the 6% earnings on $10,000 that you paid for the gun. This is the exact same result as above.

If you lose money on the gun, the result is about the same as buying the gun outside the IRA. Say you sell it for $8,000, and lose $2,000. You owe $2,000 on your equity line. Pay it off, the loss is the same as using non-IRA money.

finger, or other advisors, you might want to weigh in on this. I can't help with investments, so this is my gift back to the members of this site. If there are points I missed, let's discuss and we'll adjust as needed.

Danny

Compare this to

 

[phirel]

I have a much easier way. I éclair myself as a professional shooter. I have a significant business loss each year. If the IRS questions the fact that there are professional shooters, I will refer them to this site.

Pat Ireland

 

[Bob Hawkes]

G D IT Pat, you did it again! I almost lost my coffee that was swallowed an hour ago. PMP's LOL. Where do you get it? Forget that question, I don't think I really want to know. Have a good trip to Michigan, Bob

 

[dmarbell]

Pat,

I know sarcasm when it slaps me in the face.

That actually works if you run it as a business, and try to make a profit. You need a business plan and all sorts of things a normal business would have. You can then write-off business use of home, travel, shells, equipment including guns, etc.

I don't know if you can make a profit with prize money in trap, really. But if you are trying to compete and get a reputation as a teacher, that might work.

Most people are told the home office deduction is a flag and will get you an audit. So? If you are truly in business and use your home, you should take the write-offs. If you inherited $3 million and decided to give the church it's tithe, would you write-off the $300k? Of course, and it would be a flag for certain.

My point is that there are people with significant IRA balances who listen to conventional wisdom, and won't withdraw the money because of tax issues. There are creative ways around the taxes.

By the way, the deferred taxes in your IRA belong to the IRS anyway, and leaving the taxes in the account over time won't make it any better.

Pat, by the way, thanks for the patient help on my posts.

Danny

 

[W.P.T.]

Danny,

You be better off to leave the money in the IRA, and invest the money you would use for a mortgage and gun payment after paying cash for the house, and the gun ... Carry a 50% mortgage on the income property you own and use that as your right off and rather than compound interest compound rental property because it appreciates faster than money in the bank, while having an income from it ... WPT ... (YAC) ...

 

[halfmile]

If you take a loan out on your 401K, the interest that is charged goes into your account. This is like putting more in than the max allowable amount.

I would rather pay interest to myself than some *******.

Just found out about this a month ago.

HM

 

[dmarbell]

WPT and HM,

All these are good ideas. Which one is best from an investment standpoint depends on the rate of return on the IRA account, rate of interest charged on 401K loans, appreciation of property rate, etc. I didn't want to get into these issues. Everybody has their own risk and reward profile for investments.

I just wanted to illustrate a method for offsetting taxable IRA distributions against mortgage interest, which to me has the same effect as buying the gun with IRA money without paying the tax on the distribution. It's a technique, not an investment method.

I don't want someone not buying a nice gun because they have all, or mostly, IRA money, and they think they have to withdraw, say, $15,000 and pay the tax to have $10,000 left to buy the gun. Instead, you could withdraw $50 per month with no tax. The gun is worth $10,000 and the loan on the house is $10,000. Economically, you're in the same position as paying cash for the gun.

Danny

 

[Old Dr. Bill]

You forgot about the $$ the $10,000 would have earned while in the IRA account.

 

[alpine]

Tax evasion is illegal; tax avoidance is an art form.

You gotta love this discussion.

 

[870]

Fun excercise on paper, but realize that as written the IRA is only being used to pay the $50 per month loan interest. It is not paying for the gun. In the example, when the loan comes due you are forced to sell the gun to pay the loan. Granted, for someone that cannot afford the $50 a month loan interest payment w/o raiding the IRA, these moves will save them a little bit of tax.

Understand it for what it is. Just so you don't all run out and start the paperwork right away, if you can get the HE loan and pay the $50 interest payment from funds outside the IRA, you will be better off, since you net out with the interest deduction for taxes instead of the interest deduction being offset by the IRA distribution.

 

[Jeff P]

I always love to listen to people who tout paying interest, to anyone, for anything as the way to go....

Face it guys, you're a lot better of saving your money and paying cash for something rather than paying $1 in interest so you can "save" the 25 cents in tax. Wish I had a buck for everyone of my clients who went out and re-financed a rental house so that they could pay $1,200 a month in interest and thereby save $300 a month on their taxes. Hmmm....pay $1,200 to the bank, or $300 to the IRS....can't decide.

But what the hell do I know....

Jeff P, CPA
Alaska license 2132

 

[Hauxfan]

Hell, and here all this time I've been paying cash.

Dumb me!

Hauxfan!

 

[CharlesR1100]

Walk ? I would not even look accross the street at a 6% return with our current stock market. 20% at least. If you are careful.

As for paying interest to anyone, Jeff P is right on the mark. Pay with cash.

You say the gun is priced too high? Not if it is the market price. Nope, the real answer is you do not make enough money. OUCH!

Sure, it is possible to pay for a gun with a loan and interest payments. But the best way is with cash toward a gun you can afford. Nothing new here.

 

[gbatch]

Tax minimization is one thing. Tax avoidance is something else entirely. I'd love for ther IRS to go away, but reality is they won't in my lifetime. So, while paying taxes may be a PIA, do it with a smile because the alternative is not pleasant.
Ask Wesley Snipes.

Gene Batchelar
Wheaton, IL

 

[CharlesR1100]

Four points:

1. Life is not all about "creating wealth." (Careful, getting heavy.)

2. This is, and has been for well over a year, a bull stock market. So get out when you should. Then go to the 3 and 4% C.D.s. It is a cycle.

3. Do not buy on time, paying interest, anything that does not appreciate in value. Pay cash. If you do not make enough and can not afford it, do not buy it. If it appreciates in value, OK to buy on time. But...

4. Still "best" to pay cash in any event, and invest the interest you saved.

 

[Phil E]

Tomk2: Thanks, buddy. Coffee all over my keyboard. You're so right. I just love borrow-yourself-wealthy advice. Phil E

 

[phirel]

jeff p - You make sense. Spending $1 in interest to save 25 cents in taxes does not sound like a sound move.

bob finger - Creating wealth, at least on paper can have some negative consequences. I own, debt free, several appreciating investment properties that I have fully depreciated. Looks nice on paper but if I sell them to gain cash, the tax burden is so great that I have no choice except to keep the properties. I have wealth on paper but no way to turn it into cash.

Pat Ireland

 

[dmarbell]

Sorry, but almost everyone on this post is missing the point. Or missing at least the point I had intended to make. It's not about the best rate of return, or tax savings, or beating the IRS as such.

It's not: "Should I use my IRA to buy a gun?'

It's: "Can I use my IRA to buy a gun (without tax)?"

Read the original post. I'm not talking about retirement money your need. I clearly stated IRA money you don't need to live on. If buying a gun causes you financial problems in the future, you shouldn't buy the damned gun. Cash, credit or otherwise.

First, you have to make the outrageous assumption that you can buy an expensive gun that will not go down in value. It makes the understanding easier, even though it really doesn't matter. If the gun goes down in value, you lose the same amount whether you pay cash or finance it. Trust me.

Paying the interest you earn to a bank at the same rate is the same as paying cash and foregoing the interest earned at said rate. Period.

The issue is this: "Can I use my IRA to buy a gun, without paying tax?" Yes, if you do it this way. 6% income less 6% deductible interest = zero cost for the gun. Same as paying cash from your IRA, without tax, and then repaying your IRA when you sell the gun (with the outrageous assumption that you didn't lose money).

Let's assume you can shoot a gun for 5 years and sell it for what you paid for it. Just bear with me on that issue. Gun costs $10,000.

It's like you took $10,000 out of your IRA, without tax, lost the 6% earnings on the IRA for five years, and then repaid the IRA when you sold the gun. Same as paying cash, except you used IRA funds, which are usually taxable.

Jeff CPA in Alaska. Yes, I have agreed it's better not to pay interest just to save taxes. But the cash payment aspects of your advice worries me. Rarely is real estate purchased with cash in this country. Without leverage, the real estate industry would collapse. Now I know real estate is not a depreciating asset. But the people on this site have already decided to purchase guns for hobbies, depreciation be damned.

Forget rates of returns and think about methods. You can't buy collectibles with your IRA, but you can finance them if you do it correctly.

Besides, with rates this low, you have at least a chance to make money on the deal. Your IRA money remains invested. The withdrawal rate is fixed at 6%, and the mortgage rate is fixed (for some period) at 6%. If you make more than 6% in your IRA, it's BETTER than paying cash.

Danny

 

[$$$SHTR]

As I travel through this life, I find two things that are always true, no matter what you might see on TV or read in the newspapers;

You can not borrow yourself out of debt

You can not eat yourself skinny

Borrowing from your retirement monies can leave you with less than you started with and no time to re-coup.

Tomas

 

[phirel]

tomk2- If you buy an investment property for $100,000 and sell it for $200,000 your taxable profit is $100,000. If you buy the property for $100,000 and depreciate it on your taxes to 0 and then sell it for $200,000, you are then taxed on a $200,000 profit.

Pat Ireland