191-Friday Q&A: Invest or Pay Off Debt, Rent or Buy Calculations, Double Tax Credit for Multiple 529 Accounts, Roth Conversion or Not

May 8, 2015

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Today, I handle these four questions:

3:02 Joshua, I just started listening to your show and I've learned a lot already. I originally started listening because I have an interest in one day becoming a personal finance consultant, but that's a long way off, for now I just need help with a crazy student loan issue! I am currently paying almost $600 a month for a $102k student loan at 7%, couple of key things, credit is shot due to bk filed last year, the loan is with the nelnet through dept of Ed, the question is should I pay down the loan, or find an investment that will pay me $600 to offset payment? Right now the $600 is preventing me from moving forward on anything financial, I'm expecting a lump some of money in February, like $60k, I would love to invest it where I can earn $600 or more a month to offset the payment! Any ideas?
28:56 Joshua, I recently stumbled upon your podcast and just started listening to it from the very beginning. Your approach to each podcast has been a from a very practical point of view which I really appreciate and hence enjoy listening to it! Please keep up the great work! At the time of writing this, I just finished with the episode "rfp-0009 - Why is your house a terrible investment." I myself am in the stage of having signed a contract on a home and waiting for closing date. All through the show James and yourself have made many, many valid points. I myself have already tracked down my cost (also factoring in an average monthly maintenance expense) to owning a home in an excel spreadsheet and even-though most often than not, one usually tends to buy a home which is slightly bigger in area that the what one was renting (same with me), the numbers for buying a home vs renting still look better (to me) in the long run. I live in the slightly expensive Northern VA area. I have been renting for the last 7.5 years (in various capacities from being a full-time student to full-time employee to full-time employee + part-time student) and can definitely say that annual rent increase adds up over each year. In order to keep the rents at a reasonable rates you will have to move every 2 or 3 years. This would add moving expenses, cleaning expenses, security deposits and a peace-less mind to your rent calculations. But this has not been factored into the James' calculations. Yes, when you own a home your property taxes may also go up as the home appreciates, but this won't be as much as how much the rent would increase year-in year-out. Also your home may or may not appreciate every year for this to happen. Would like to know what your comments are to this.
36:09 Joshua, I have a 1 year old son and am married. My wife is in school earning her PhD. Can my wife and I create two separate 529 plans to double our tax benefits (one in my son's name and one for my wife)? Indiana's benefit is 20% tax credit ($1000 max credit). If not should we create a 529 anyway? We have the money to pay for her $30,000 education already saved to be spread over the next 3 years. Thoughts?
40:06 Joshua, My parents just recently started working with a fee-only financial adviser after their recent retirement. She has been doing a nice job with them so far helping them come up with their financial goals, seeing if they are able to achieve them with their current assets, and choosing the most appropriate Social Security choice for their needs and goals. I have been attending the meetings with them. Either in the next meeting or the meeting after, the question of converting their traditional IRA to a Roth IRA will come up. Other than their paid-off house, most of their portfolio is in traditional IRAs. She is of the belief that it doesn't make sense to convert any of the traditional IRA to Roth because they don't have the taxable funds to pay the necessary taxes. I'm of the opinion that since the income they currently receive from their IRAs is well under the $74,900 limit (filing jointly) keeping them in the 25% bracket, that they should convert some of it and pay the 25% tax rate before they have to start taking much larger RMDs in the future at higher tax rates. Of course that also ignores future potential tax hikes. They understand the benefits of having some flexibility for the future as well as the benefits of passing a Roth to me and my sister on their deaths (another one of their goals). The question I have is: What are the appropriate questions to ask the financial advisor as to how to look into whether converting makes sense outside of the generalities that you shouldn't because you don't have taxable funds? How do you 'run the numbers' so to speak to determine if converting is in their best interest? And also, how do you come up with that sweet spot amount in order to stay inside the 25% tax bracket and not pay taxes outside that bracket? Is that a question for a tax accountant or should a financial adviser be able to answer that question as well? Thanks for all you do.

Enjoy the show!

Joshua