PLEASE! Call or email us before you spend $5,000 or more

Man on phone at computer

Almost every month I speak with a client who told me about a new house they bought, or a 401(k) loan they took or a service they paid for without running it by us. This is a mistake. I cringe when I have to point out there was a more cost efficient money decision that could have been made. If you’re planning on making a decision that’s more than $5,000 please call or email us. The worst thing that happens is we review your purchase plan and agree that you are going about it the best way.  Many times we help clients save a lot of money.

My favorite recent savings story involved a family looking to refinance their home.  Interest rates had declined more then 1.5% below their current mortgage rate which would allow them to save thousands of dollars.  They were also very close to having more than 20% equity in their home –  the threshhold where Private Mortgage Insurance (PMI) would not be required on their mortgage.  PMI is expensive. It typically costs 0.50% –  1.00% of the amount of the loan annually.  On a $480k loan that could be another $2400 –  4800 expense every year or $200 –  400 more on the monthly payment.  The monthly payment without PMI would be about $2,300 for a 30 year fixed mortgage with 4.00% interest.

The client called me and asked to make a withdrawal of $25,000 from his IRA. I asked what the withdrawal was for since it would trigger a 10% IRS penalty plus tax since the client was not close to age 59.5 (when the 10% penalty goes away). He explained how he would use the money to get under the PMI threshhold. He did some math and figured the breakeven point of this expensive withdrawal would be less than three years without the PMI. However, he did not consider that he was permanently reducing his retirement account – a big no-no outside of massive emergencies.

Rather than take the withdrawal we proposed that he roll $50,000 from his IRA into his new company’s 401(k) plan and set up a loan for the $25,000 his family needed to aviod PMI on his mortgage refinance.  The loan would have a 5% interest rate, but interest paid on 401(k) loans goes to to the borrower’s account so it’s not a necessarily a bad cost. Had he taken the withdrawal the client would have had to take out $33,333 assuming a 25% tax rate and he would have also owed the $3,333 IRS penalty.

This brief 15 minute conversation saved $11,667 in tax and penalties!

Not every situation results in such large savings, but even if its a few hundred dollars isn’t it worth the call?

Question: What purchase or expense do you have coming up that you would like to run buy us?

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Third party posts found on this profile do not reflect the views of LPL Financial and have not been reviewed by LPL Financial as to the accuracy or completeness.

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