Need advice for lump sum of money

Discussion in 'Business, Investing & Finance' started by Concrete Helmet, Jul 29, 2019.

  1. Concrete Helmet

    Concrete Helmet Hook, Line, and Sinker
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    Alright I'm a great advice giver when looking at other peoples issues BUT a horrible decision maker and procrastinator when dealing with my own so I figured I'd ask.

    I will be coming into a chunk of money in the near future, nothing that would set me sailing off into the sunset but a decent chunk none the less. Here's where I struggle. I have personal rental properties that are about 50/50 mortgage to current value with about 10 years left on them and they are at 3.75% on 15 year terms. The sum of money would pay almost half of that debt down leaving about 5 years left to free and clear.

    The problem is that I am a really late bloomer when it comes to traditional retirement savings. Until several years ago I really had nothing but a savings and checking account besides rental property. I now have a PSP from work that is pretty close to a max 401K annually, a Traditional IRA, and a few retirement CD's, that's it.

    I've come into similar amounts of money twice before and other than putting down payments on houses I mostly pissed it away. I have no debt and no expenses, company pays for my health and auto insurance, gas, maintenance and such and the Wife, who is one helluva lot smarter than me and saved a sh!t ton over the years, pays for everything at home.

    Would you pay down the mortgages or perhaps invest it another way? And no the new Corvette is not an option this time.:lol2:
     
  2. Gator By Marriage

    Gator By Marriage A convert to Gatorism
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    Go to Vegas baby and put all on black at the roulette wheel!
    Seriously, I'd go the IRA route. It's tough to know for sure are there are a lot of other factors at play you haven't mentioned, but if the rentals are taking care of themselves why put it there? Since you were late to investing for retirement, this is a nice way to catch up. Do bear in mind that as I am not a financial planning professional, my free advice is not worth much.
     
    • FireFoley

      FireFoley Senior Member
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      It appears you have good terms on those rental properties in regards to rate and duration, so as long as they are rented and you are no worse than cash flow neutral on them, that I would not pay down the debt. I would put as much as possible into a tax deferred account if you can, but since I don;t know the source I am not sure if that is an option. If not I would invest in what is most comfortable for you. Stocks, real estate, bonds, exotic stuff, etc. But please do not waste it. Continue to live as if you did not get it and when you need it it will have grown greatly. My only recommendation is not to give one penny of it to the wife :lmao2:
       
      • Concrete Helmet

        Concrete Helmet Hook, Line, and Sinker
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        That's a pretty good point-taxable vs tax deferred- and one I was going to bring up.
         
      • g8r.tom

        g8r.tom Well-Known Member
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        two words - Lotto tickets
         
        • Concrete Helmet

          Concrete Helmet Hook, Line, and Sinker
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          Don't laugh,I hit a small jackpot in 2005....I had 5 of 6 and had the # 40 for the sixth...needed # 41. It's been the staple of my retirement portfolio every since. :lol:
           
          • 78

            78 Dazed and Confused
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            Without knowing how large a lump sum, it's a bit murky. But ...

            Max out your salary deferrals at work, both you and you wife.

            Make max Roth contributions for you and her provided your MAGI (AGI minus IRA and HSA contributions) is less than 203k.

            Put the balance in a low-cost deferred annuity or withhold enough to fund your 2020 Roth contributions.
             
            • Gator By Marriage

              Gator By Marriage A convert to Gatorism
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              @Concrete Helmet, this is what I meant to say.....
               
            • 78

              78 Dazed and Confused
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              Alternatively, use the balance to buy a basket of stocks or a passive ETF and use it as a method of deferral versus the annuity.

              One problem, actually two.

              Every time you go to sell and redeploy the proceeds based on market conditions, you'll be subject to capital gains tax.

              Secondly, you gotta keep track of cost basis on any shares sold. That's not as much of an issue now that firms are required to report it, but it does add to the cost of doing your tax return.
               
              #9 78, Jul 29, 2019
              Last edited: Jul 29, 2019
            • URGatorBait

              URGatorBait #TeamDubs
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              Everything 78 said.
               
            • Concrete Helmet

              Concrete Helmet Hook, Line, and Sinker
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              Thanks 78. Let me kinda backtrack here if I may though....this is strictly on me....I married up(2nd time) and my Wife is not a concern, her MAGI is well beyond the limitations. She is more than set which is why we file separately(I claim Jr.)I also work for her as an employee.
              I cannot defer anymore of my salary other than the IRA contribution because we have a PSP(employees cannot contribute it's strictly distributed by the owner(my wife). Do you know of a small business type plan where we can maximize deferred contributions taxable or tax deferred? She choose the PSP because she already works 75 hours a week and doesn't want another headache to deal with? Thanks.
               
            • 78

              78 Dazed and Confused
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              Haha, lucky guy. If you're a W-2 employee, your only option is an IRA or Roth contribution. The phase-out on deductible IRA contributions for a married filing separate filer is low. You'll likely need to fund a Roth and then consider the balance options I presented.

              Bear in kind, I know nothing about your situation beyond what you have shared here. I generally spend a few hours with clients and gather lots of information before I make recommendations.
               
              • Concrete Helmet

                Concrete Helmet Hook, Line, and Sinker
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                Appreciate your input and understand you get paid for your services.... We meet with the longtime and somewhat long in the tooth IMO "financial advisor" in a couple of weeks to fund and distribute the PSP for this year... Perhaps if he doesn't have better solutions for her personal, the company plan and my chump change we should talk.

                I've been in her ear for a while now and she usually ends up listening to my advice regarding matters even if it is just to shut me the f vck up....:lol:
                 
                • 78

                  78 Dazed and Confused
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                  BTW, are you sure the PSP doesn't have a 401(k) attached? They often do. If not, she might want to consider adding one to enable employees to make salary deferrals. That is, if she doesn't want the company to make them.

                  As it is, a PSP has a high employer contribution limit -- $62,000 for participants above 50.
                   
                  • Concrete Helmet

                    Concrete Helmet Hook, Line, and Sinker
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                    It does not. Like I said she chose the easiest program to deal with because operating the business has been full tilt madness for going on 5 years now(refi craze). I just think in her mind she doesn't want to start something and then have to stop it if business tanks so she just bonuses while were busy and uses the PSP to incentivize employees to perform.
                     
                  • GatorInGeorgia

                    GatorInGeorgia Senior Member
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                    How many rentals do you own, if you don’t mind me asking?
                     
                  • g8r.tom

                    g8r.tom Well-Known Member
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                    And do you use a property management or self manage?
                     
                  • GatorInGeorgia

                    GatorInGeorgia Senior Member
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                    Like 78 said, your wife should strongly consider amending the current PSP plan to allow for 401k deferrals. There really isn’t much, if any, downside but plenty of upside. Potentially, you, your wife and the other employees could salary defer up to $19,000 ($25k for 50+ years old) and still get the employer funded PSP contribution. You could be looking at potentially $56k ($62k for over age 50) in annual savings rather than significantly less, most likely, with the PSP only plan.
                     
                    • GatorInGeorgia

                      GatorInGeorgia Senior Member
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                      Okay, here is my advice. It is a different than what others have already said. I guess you could say I'm looking at this through a different lens. I don't know the number of properties you own but we can go with made up #'s as it really doesn't matter in the grand scheme of this post. Let's assume you have 10 properties.

                      Effectively, you currently own 5 properties free & clear (50% debt to equity on the assumed number of 10 properties total) if you just rejigger your financing a little bit, which is what I would do. This is important IMO because let's say hypothetically you ran into cash flow problems (maybe the rental market craps the bed, a Lehman Brothers 2.0 event happens, etc.). You only have 5 properties at risk of being taken back by the lender if you can't swing the payments, rather than having all 10 properties at risk. It would really suck to have so much equity in a property wiped out because of unexpected, short term cash flow problems. So, the first things I would do is start to refinance the properties so that you only have mortgages on half of your properties and you own the other half free & clear. At the same time, I would consult with a lawyer that deals with asset protection and have him structure the ownership of the 5 you own free & clear in asset protected vehicles (maybe individual LLCs or something along those lines...how this is done may vary depending on where you live). If you can also put the other 5 that will have mortgages on them in a separate LLC for each one individually, by all means consider it. You will probably need to use your inheritance (or a chunk of it at least) to do this unless you have a lender that will give you 100% financing on the 5 properties you will keep mortgaged (remember, you have 50% equity in all the properties so if you own half free & clear the other half will be 100% LTV unless you use your windfall...you probably won't be able to get 100% LTV financing is my guess). I would do this because worst case scenario you have something happen financially (bankruptcy due to unforeseen events, you get sued and slapped with a big judgement, etc.), you are most likely protecting quite a few of your rental properties from creditors and you leave yourself with a nice nest egg even in the worst case scenario, while giving yourself the flexibility to walk away from those that are financed at 80/90%. I would consider putting the remaining properties that will still have mortgages on a 30 year fixed rate. This way you still benefit from the using OPM in this low rate environment we find ourselves in. The properties you now own free & clear effectively are your annuity as they spit out monthly income for you to live off of. You'll probably be cash flow positive on the properties that are still mortgaged as you've stretched the duration out to 30 years. Use some of your positive cash flow to invest in the market if you so choose realizing that you will be dollar cost averaging in over many years while giving yourself the ability to stop monthly contributions as needed if a need ever arises. Use the income from your job to fund your Roth or individual IRA (you won't need as much discretionary income from your job as your rental income will be available for you to spend). Then treat yourself to a nice steak dinner at the best restaurant in town and go have some fun!
                       
                      #19 GatorInGeorgia, Jul 30, 2019
                      Last edited: Jul 30, 2019
                      • 78

                        78 Dazed and Confused
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                        That's definitely another path. Leverage your real estate holdings. It'll work it you play it smart. The income pays for your equity.

                        Lots of sweat labor and management, your eggs in the same basket, but it can work.

                        The planet is full of stories about people making fortunes on investment real estate. Huge tax advantages.
                         

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