Should I Pay My Mortgage Off Early?

Should I Pay my Mortgage Off Early? This is actually a FAQ – a frequently asked question, so I thought I’d spend a little time on it here. Some other mortgage-related topics we’ve addressed are these:

  • How Much House Can I Afford?
  • Your First Home Purchase
  • How Much HouseMortgage Can I Afford?
  • Using an IRA for a First Home Purchase
  • The Fifteen Year Mortgage

A Mortgage Example
Let’s use a sample mortgage. $400,000 borrowed, at 4.5%, over 30 years. The monthly payment is $2026.74. That means over the life of the mortgage you will have paid $729,626.85 in principal and interest payments to repay that $400,000 loan – and, of course, $329,626.85 of that amount is interest.

You pay interest each month on the unpaid balance. In early years your payment is mostly interest, with very little principal repayment. In later years, situation reverses: you pay mostly principal, with much of the interest having been paid in the earlier years.

Using our sample mortgage,...

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SIMPLE IRA

Savings Incentive Match Plan for Employees
The SIMPLE IRA is the Savings Incentive Match Plan for Employees. The SIMPLE allows for both employer contributions and employee deferrals. The plan is deal for employers who want to contribute something – but not a lot – to employee retirement accounts.

A big part of retirement plan design has to do with discrimination. The IRS wants to be sure that the plan does not discriminate, meaning that the plan’s benefits are available across the board to all employees – both management and rank-and-file.

SEP Recap
This post is the second in a series of two about retirement plans available to the small business. Previously I discussed the SEP IRA, or Simplified Employee Pension. The most notable thing about the SEP is that money goes into an employee’s account from only one source – the employer’s contribution. The same percentage of earnings – up to 25% – must be contributed across the board. If...

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The SEP IRA

With this blog post I’m beginning a two-part series about retirement savings plans available to the small business owner. Earlier Jonathan and I have written about the Traditional IRA and the Roth IRA. In this piece I’m going to explain the Simplified Employee Pension, or SEP IRA. It is best used in a small shop, with few (or no) employees. It can be established by an individual proprietor, filing a Schedule C, or by a corporation, LLC, or partnership.

The SEP – Simplified Employee Pension
The SEP is designed for the business owner with few employees. Money goes into the SEP from employer contributions only. All contributions are tax-deductible to the employer. There is no opportunity for employee deferrals. A SEP IRA account is opened for each participant, and all funds contributed are immediately vested. (There is an older version, called a SARSEP, or salary reduction SEP. Although many are still out there, they cannot be opened after 1996.)

The employer must...

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What is an IRA?

Here is something we hear on occasion at CameronDowning: “I’m not sure an IRA is for me. I hear it may be too risky.” The problem with this statement is that an IRA, or Individual Retirement Account, is not an investment. So what is an IRA?

An IRA is technically a registration
It holds investments, but is not an investment itself. You can put all kinds of investments within an IRA. Consequently, stocks, bonds, mutual funds, CDs, and even gold bullion are investment options within an IRA. You can be 100% in cash in an IRA, which by definition has no risk. We’ve also commonly seen annuities put in IRAs which is typically not a good idea, and I discuss why elsewhere.

So what is an IRA?
Getting the terminology right is important. Picture a candy wrapper holding chocolate inside. An IRA is like the candy wrapper. Likewise, there are different kinds of candy wrappers just like there are various kinds of IRA registrations. Traditional, Roth, SEP, SIMPLE are the most...

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Why I Don’t Like an Annuity in an IRA

An annuity in an IRA is typically a dead giveaway that a client worked with a salesperson, not a financial planner. Annuities, like any other tool, are not inherently bad. They work best when they do the job they were designed to do – and that job is income distribution. Annuities can be a useful accumulation vehicle for those with a more conservative investing outlook. They make sense for asset protection. An annuity is also a safe way to create a perpetual stream of income without market risk. Also, the use of a single premium immediate annuity, or SPIA, has particular application in estate planning. But an annuity in an IRA? Why???

Annuity salesmen & first responders
While annuities are appropriate in certain circumstances, most clients do not have the special planning needs that make an annuity in their best interests. Law enforcement, firefighters, and other first responders, are marketed heavily by annuity salesmen. Why? The often have DROP payments. Annuities pay a...

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What is a Stretch IRA?

The stretch IRA is one in which the beneficiary chooses not to distribute the inherited account all at once, but to take required minimum distributions according to his (own) life expectancy. Please refer to my previous post about RMDs.

If you are a non-spouse IRA beneficiary, you have some choices. You can simply sell the assets and distribute them to yourself. This must be done by the end of the fifth year after the IRA owner died. The amount distributed is added to your taxable income for that year, and can run you right up the tax brackets. The taxation sort of makes sense, though, in that the traditional IRA owner was never taxed on the contributions to the account, nor on the growth within the account. So at distribution the IRS gets its own.

Even better, though, is the option of stretching the IRA. This simply means taking required minimum distributions over the beneficiary’s life (beginning the year after inheriting the account). Since the younger beneficiary has a...

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