THE TRUTH ABOUT MONEY
By Ric Edelman
How much mortgage interest can I deduct?
Ric, I have a question about refinancing. I bought my house a few years ago. The house was worth about $180,000 at that time. I got a loan for $140,000, and then I refinanced a few years ago for $203,000. I would like to refinance it now, and I know I could get up to $300,000 easily. How much can I borrow and still deduct all of the interest?
You are allowed to deduct interest on loans of up to $100,000 more than the current mortgage balance (of the original loan amount) plus the amount of any improvements. Therefore, since your original loan was $140,000, your new loan could be as much as $240,000. And if you plan on spending $60,000 on home improvements (not repairs, mind you) then the new loan could be $300,000.
In one of your books, you advised that "no one should ever make a financial decision based on perceived tax benefits..." Don't you recommend IRAs and 401(k) plans? As a 30-year old, the only reason I might consider those is the perceived tax benefits. Why else would anyone participate in any of these financial schemes?
The IRAs and 401(k) plans are really not investments; they are merely sections of the tax code that refer to how investments are taxed. In each case, most people who have IRAs and 401(k) plans have their money invested usually in a variety of vehicles, and you can buy most of those same investments outside an IRA or 401(k).
In fact, the only thing the account options provide you is different tax treatment. Thus, if you chose the 401(k) or IRA and it's later negated by the whim of Congress, you simply find yourself in the same situation as if you had never funded that type of account in the first place. Therefore, under the "worst-case scenario" you're no worse off.
That's different from investments that people buy solely or primarily for their tax benefits, such as tax shelter deals. In those deals, if the tax benefits are eliminated, your investment can be wiped out. That's why I wrote, regarding those deals, that no one should ever buy an investment solely based on perceived tax benefits.
I have a question about 529 college-savings plans. My son has three sets of grandparents who all want to contribute to his college education. I was wondering if one could have more than one 529 account? If so, is it worthwhile to have more than one 529 account?
You can have as many 529 accounts as you wish. There is also no restriction on the number of people who can have a 529 account. So, you can have everybody contribute to one account, or everybody can fund their own.
If everyone creates their own account, each person owns his own account and thus controls it. This means each person controls the investments purchased and each person gets to decide which child in the family gets the money, and when they get it. If you can help fund a 529 account that someone else already established, you lose that control. And remember: The owner of the account has the legal right to withdraw the money and keep it (subject to taxes and 10 percent penalty).
Also, be aware that most states require a one-time fee to open a 529 account. So if you are going to open 5 accounts, you're going to incur that fee five times. So should the family use one 529 account, or several? That's for you to decide.
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