Question: I bought my house in 1968 with a 30-year mortgage. I am contemplating paying off the mortgage in full now. What is the possibility of doing this? Do you recommend it?
Answer: You can determine the possibility of early payoff by reading the mortgage document for or asking your lender. It is unlikely that there would be as problem. Mortgages of that period with a clause restricting premature payments usually imposed a penalty only during the first years.
Besides, the lender would probably be delighted to have you pay the balance now -- and might even be willing to pay you a bonus. He can take your money and re-lend it at a much higher rate of interest.
For the same reason, even in the absence of other information on your financial situation, my recommendation is "Don't do it. Althought you didn't specify, my guess is that a 30-year mortgage taken in 1968 would carry an interest rate of around 7 percent.
The interest on the mortgage is deductible on your tax return, so the net cost to you is something less than 7 percent -- perhaps in the neighborhood of 5 percent.
What can you do with the cash you have if you don't pay off the mortgage? There are a number of attractive alternative investments; but since I don't know your tax rate, let's look only at municipal bonds (on which there is no federal income tax).
As this is written you can get high-quality, tax-free bonds paying around 10 percent -- a much nicer neighborhood than the net after tax cost to you of the mortgage.
Q: About a year ago I loaned a freind $1,200 to help him buy a used car. Now it looks like I've lost both the money and the friend -- I can't find him and nobody seems to know where he is. I hear there is a tax break for things like this. True?
A: True. An uncollectible loan of this type is considered a nonbusiness bad debt. You can claim the $1,200 as a short-term capital loss on Schedule D, so the full amount can be deducted from other income (assuming you have no counterbalancing capital gains).
The loss should be taken for the tax year in which you determine you have no more chance at collection. So if you have just reached that conclusion, it will go on your 1981 tax return.
Although this item on your return isn't likely to trigger an audit by itself, you should have supporting papers available if they should be needed.
This would include such things as the original check, perhaps a note or IOU from your friend, copies of any letters requesting payment, and memos of your attempts to collect the money.
Q. You have said that in IRA shouldn't be set up in any kind of tax-exempt investment. I expect to have a substantial income after retirement and will probably want some nontaxable return even then. Wouldn't a tax-emempt IRA make sense in my case?
A: Your question points up an interesting but little-known provision of the rules governing IRA's. Normal post-retirement distributions form an IRA are taxable as ordinary income in the year received -- regardless of the nature of the IRA investment itself.
Even if the funds in your retirement account are invested in municipal bonds (normally tax-free), you must report as taxable income all money distributed to you from the account.
The main reason for any recommendation that IRA money be placed in a normally taxable investment medium is that tax is deferred on current earnings in an IRA anyway. So you should take advantage of the higher yields generally available from a taxable investment.
But as you see, it makes sense even to someone fortunate enough to be concerned about tax shelters after retirement. Even if you expect to be in the same tax bracket then as now, you have what amounts to an interest-free loan from the government for the period from investment to withdrawal.