brett@ucla-cs.UUCP (08/31/84)
I found the following question and answer particularly interesting.
Its from an IRA mailer.
Q: Does it make sense to borrow money to fund my IRA?
A: In many cases it does. Of course, it depends on your particular
situation. But here's one example.
If you're in a 40% tax bracket and contribute $2,000 to an IRA,
you save $800 in current income taxes.
If you borrow that $2,000 for a year at an interest rate of, say,
15%, you'd pay $166 in interest if you paid back your loan in 12
equal payments. You can then deduct the $166 from your taxes.
Given you 40% tax bracket, you'd recoup $66 of that interest
expense as a tax deduction. This means that your one-year loan
would cost you only $100. That's a small price to pay for
a current tax savings of $800.
--
Brett Fleisch
University of California Los Angeles
3804 Boelter Hall
Los Angeles, CA 90024
Phone: 474-5317
brett@ucla-cs.ARPA or
...!{cepu, ihnp4, trwspp, ucbvax}!ucla-cs!brett
-------------------------------------------------------------------------pvlm@hou2f.UUCP (P.LAMASTER) (09/04/84)
The only problem with borrowing money to finance an IRA is that the IRS code specifically prohibits doing it. I can't quote from the code so I'm not 100% sure, but I'm fairly certain that the IRS went out of their way to prevent the exact scenario suggested. Pete LaMaster NJ (201)949-5009 ihnp4!hou2f!pvlm
mmm@ea.UUCP (09/05/84)
#R:ucla-cs:-103100:ea:4700003:000:425 ea!mmm Sep 4 22:22:00 1984 Buy low, sell high ... nothing to it! I heard last year that the IRS wouldn't allow the deduction of interest on a loan used to finance a tax - free investment, including IRA's. It surprised me when my bank and credit union started sending crap encouraging me to borrow money, put it in one of their IRA plans, and deduct the interest on the loan. What's the latest? Anybody been involved in a judgement? mark m.
joec@u1100a.UUCP (09/05/84)
{eat me}
Pete LaMaster says :
The only problem with borrowing money to finance an IRA is that
the IRS code specifically prohibits doing it. I can't quote from
the code so I'm not 100% sure, but I'm fairly certain that the IRS
went out of their way to prevent the exact scenario suggested.
I agree with him, but consider the following:
This year, suppose I am going to Europe for vacation and I plan to spend
$2000 doing it. Rather than spend the $2000 I put aside for vacation,
I borrow $2000 for the trip, and put my $2000 vacation money in an
IRA. In essence, I borrowed the money to finance my IRA.
Can such a scheme/scam get by the IRA rules (which I don't know too much
about anyways). Just borrow money for other things, and put the money
you would have spent into an IRA.
Joe Carfagno {allegra,pyux??,ihnp4}!u1100a!joecarnold@umcp-cs.UUCP (Arnold Miller) (09/05/84)
I may be wrong but I thought that you can not declare the
interest you pay on a loan to get an IRA to be a tax decution.
I thought that IRA's were condisered to be the same as
Tax-defered or Tax-free bonds. To borrow money to abtain these Items
and have their interest tax decutable seems to be giving you two
decutions for the same item, which the IRS should not allow.
But who am I to argue with the an IRS publication
--
- - -- --- -- --- --- -- --- -- -- -- --- --- -
Arnold Miller, U of Maryland, College Park Md.
UUCP: {seismo,allegra,brl-bmd}!umcp-cs!arnold
CSNet: arnold@umcp-cs ARPA: arnold@marylandjohnson@saturn.UUCP (Mark Scott Johnson) (09/05/84)
> The only problem with borrowing money to finance an IRA is that > the IRS code specifically prohibits doing it. I can't quote from > the code so I'm not 100% sure, but I'm fairly certain that the IRS > went out of their way to prevent the exact scenario suggested. I believe this statement is incorrect. The IRS prohibits borrowing *from* an IRA or using an IRA as collateral for a loan. I am aware of no restrictions on borrowing *to* establish an IRA. In fact, many of the financial magazines (such as MONEY) and newsletters regularly carry articles encouraging people to setup IRAs even if it means borrowing the money to do so. -- Mark Scott Johnson CSnet: Johnson@HP-Labs ARPAnet: Johnson%Hp-Labs@CSnet-Relay.arpa USENET: {allegra,decvax,ihnp4,ucbvax}!hplabs!johnson
brett@ucla-cs.UUCP (09/06/84)
My idea, as I mentioned, came from a large reputable firm (Fidelity
Group, Boston). Their lawyers presumably checked it out before mailing
the idea to thousands of investors.
--
Brett Fleisch
University of California Los Angeles
3804 Boelter Hall
Los Angeles, CA 90024
Phone: 474-5317
brett@ucla-cs.ARPA or
...!{cepu, ihnp4, trwspp, ucbvax}!ucla-cs!brett
-------------------------------------------------------------------------jgpo@iwu1a.UUCP (John, KA9MNK) (09/06/84)
I believe it *is* legal to borrow money to finance your IRA. At least I
*hope* it is, 'cause that's how I started mine. When I applied to borrow
$2000, I put "funding IRA" in the purpose-of-loan space on the application.
The loan officer looked at it, said "That looks like a worthy cause," and
approved the loan.
The confusion may stem from the All-Savers certificates offered a few years
ago, where it *was* illegal to borrow money to buy one. I just wonder how
many "vacations" and "home improvements" magically turned into All-Savers
once the money was in hand. "Gee, Marge, I've got a hangnail. Can't go on
a world cruise in this condition. Well, as long as we've got all this money
not doing anything, let's buy an All-Savers."
I'd like a cell with a view, please,
John Opalko
AT&T Bell Labs
Naperville, IL
{just about anything}!ihnp4!iwu1a!jgpopvlm@hou2f.UUCP (P.LAMASTER) (09/06/84)
I'm beginning to doubt my statement about the illegality of using a loan to finance an IRA. I think that I *was* thinking about the All-Savers combined with the prohibition of using an IRA for collateral for a loan (to prohibit "getting the money early" without actually taking it out). I hope that I don't have to stick my head in mud too long to make up for my error. Pete LaMaster ihnp4!hou2f!pvlm
grant@eosp1.UUCP (Rich Grant) (09/07/84)
There needs to be a distinction between the legality of borrowing to finance an IRA, and the legality of taking a tax deduction for the interest paid on such a loan. As I remember, the instructions with the tax form explicitly stated that interest on a loan used to fund a tax free investment can not be deducted. This would seem to include an IRA, not to mention "All-Savers", municipal bonds, etc. I always wondered how they decided for what the money was borrowed. "I suppose I really wouldn't have needed that $2000 loan to remodel the kitchen if I hadn't put $2000 into the IRA this year." Rich
thisted@gargoyle.UChicago.UUCP (Ronald Thisted) (09/07/84)
An important distinction has been overlooked in this discussion: there is a difference between investments which produce *tax-free* income (municipal bonds, All-Savers certificates) and those which produce *tax-deferred* income (IRAs, Keoghs, etc). Interest and other expenses used to obtain loans to finance the former cannot be deducted; costs of loans used to obtain the latter can be. Ron Thisted (...!ihnp4!gargoyle!thisted)
john@hp-pcd.UUCP (john) (09/08/84)
<<< The IRS borrowing rule has to do with tax free securities in general. If you borrow money to purchase something that provides tax free income then you cannot deduct the interest. The reason is that if someone in the 40% bracket could get a 16% loan then he is only paying 9.6% for it. You can get tax free securities that pay 10% so you wind up collecting .4% for shuffling around OPM (Other Peoples Money). Not bad for a investment of $0. Since IRA income is eventually taxed I think it would be ok to borrow for one. John Eaton !hplabs!hp-pcd!john
johnson@saturn.UUCP (Mark Scott Johnson) (09/11/84)
An IRA is *not* a "tax-free investment"; it is a tax-deferred investment.
You *will* pay taxes on IRA money someday, but you *never* pay taxes on
All-Savers, munipical bonds, etc. There lies the important difference.
Unless someone can cite me an IRS ruling or an exact court case, I stand
by my statement that borrowing to fund an IRA is not against IRS regulations.
--
Mark Scott Johnson
CSnet: Johnson@HP-Labs
ARPAnet: Johnson%Hp-Labs@CSnet-Relay.arpa
USENET: {allegra,decvax,ihnp4,ucbvax}!hplabs!johnsonhdt@sunybcs.UUCP (Howard D. Trachtman) (09/22/84)
Be warned with your .signatures... you never now how many
IRS agents are on the net.
--
Howard D. Trachtman SUNY/Buffalo
allegra!watmath!sunybcs!hdt (UUCP)
hdt@MIT-MC.ARPA (ARPA)
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