Saving for Sailing

[Jim H]

My wife and I were impressed by two things about a year ago:

1) Our kid's Coverdell college accounts were growing nicely with their monthly installments into a class "Z" no load fund. We were at the $2000 annual limit for putting money into them.

2) We decided that if we wanted to do real cruising before our 401K accounts could be accessed, we needed an account that could be used when we were younger than 59.5 years.

Thus, we opened two Roth IRA accounts for ourselves, and pretended that they were like "college accounts for cruising." We lucked out and were able to contribute into the same class Z no load fund that we had started a couple of years earlier for the kids.

If I understand it correctly, we can withdrawl our contributions to this fund without penalty at any time, but not the interest growth until we are 59.5. If we had "converted funds" from a traditional IRA, the money would have to be in the account for five years before we could withdraw without penalty.

At this point, we can put up to $4k (I believe) into each of our accounts a year, and we have the option of pulling funds out earlier for cruising. If everything worked perfectly, we might use these accounts to fund one or two smaller boats as we age, and then a larger boat when we are in our mid fifties to cruise full time on. We would "bank" on pulling the interest on the account at age 59.5 to help fund our cruising until we start tapping into our main 401ks when were in our mid-sixties.

Are others using approaches like this? Any recommendations for better plans? We don't want to wait to cruse until our mid-sixties, and we still have the "health care" issue to resolve while we cruise, but we are happy that our "reduce monthly expenses" campaign has helped us acculumate over $4k into each of our Roth accounts so far. If we could do this for around 14 more years, and then cash out the house, we might be in good shape for cruising. It's possible we could configure something to make the plans work sooner, but we have to keep the kids' needs in mind as well.

Thanks!

Jim H

[cyclepro]

Jim:

I don't know where you got the info about non-taxable withdrawls from your Roth IRA prior to reaching 59 1/2 but, if you take out any distributions before that age, you are liable for paying taxes and sometimes penalties. This rule goes for both contributions and interest.

In the near future there might be another opportunity to save some money (tax-free)

The Bush administration has proposed expanded savings accounts that would expand Roth IRAs (renaming them as Retirement Savings Accounts or RSAs) and introduce a new Lifetime Savings Account with features similar to Roth IRAs. Both accounts would offer tax-free withdrawals with contribution limits of $5,000 each with contributions to both allowed, for a total of $10,000. Also, income limitations on conversions and setting up Roth IRAs would be eliminated. If enacted, RSAs would be effective starting in 2006. Also, Roth 401(k)s, which are currently scheduled to be available on 1/1/06, would be renamed as Roth ERSAs

Jan

[Jim H]

CyclePro, thanks for the reply. I've heard about the RSA and still interested in the details.

I believe I'm still correct, however, about withdrawls of contributions, but not interest, from Roth IRAs.

Here's a quote from a Motley Fool article about it:

Example #1: Bill, who is 25, makes a Roth IRA contribution of $2,000 this year. Seven years later (well beyond the five-tax-year period), Bill closes his Roth IRA and takes a distribution in the total amount of $4,500 (representing the original $2,000 contribution and $2,500 in earnings). Bill is not disabled, nor does he use these funds to pay first-time homebuyer expenses. Since Bill is NOT over age 59 1/2 when he takes the distribution, the distribution is NOT qualified. Bill will owe income taxes on the $2,500 of earnings. Additionally, Bill will be assessed a 10% early withdrawal penalty on this $2,500 of earnings unless he meets one of the other six authorized exceptions for avoiding that penalty. Ouch.

Remember that, under the Roth IRA rules and unlike the rules for a regular IRA, you can first remove your contributions without tax or penalty. So, in Example #1 above, if Bill decided to take a withdrawal of only $2,000, it would be treated as a distribution of his original contributions, and would not be subject to taxes or penalties. That only makes sense since Bill didn't get to deduct that contribution from his taxable income when it was originally made (so, he's already paid income tax on the money).

http://www.fool.com/money/allaboutir...boutiras06.htm

This is also the scenario described in the IRA Investor Guide I'm using:

http://www.columbiafunds.com/FormsAn...egory&section={45041080-D6F7-49C0-AABD-D0D0C9DB4679}&module={C20519AB-5EBA-44E0-AE86-B5AD49F0063C}

So, I'm making after-tax contributions, so I can remove them for a purchase before 59.5. It's true, however, that the interest from those contributions (which hasn't been taxed) must remain there until later.

Do you still think this is incorrect?

Thanks!

Jim

[BC Mike]

Whenever you purchase a financial product someone is getting paid. The cute tellers are being paid, the broker may get a commission, somehow everyone gets paid.
No matter what the sign says about the load or lack of load someone is being paid to manage a mutual fund. You pay the managers fee, and you pay the exspense fees of the fund. This fee is disclosed. The name may vary, but it is commonly shown as the MER, the management exspense ratio. For domestic funds it may be from 1 1/2 to 2 1/2%, depending on the fund and state or province, or complexity of the fund. No load funds can charge fees that other funds may not charge. Like a fee to open an account.
A no load fund may have a higher MER than a load fund. But you may be able to purchase a " load " fund at no cost.
Currently 60% of all mutual fund sales ( in Canada ) take place for no load. No purchase fee, no redemption fee. However there may be a transaction fee to withdraw some $$ and a nuisance fee to close the account. All of this will be disclosed by a qualified person. A young guy just starting is more likely to want some up front commission for selling something, so they may suggest a fund with ( DSC ) a defferred sales charge that will apply for the first few years. The DSC is for the fund company to recover the reps commission if you sell early. An older rep may not need the up front commission ( his mortage is paid off ) and can get by on the trailing fees paid to each rep for the business on the books.
Then there is the taxation. Always consider tax as a balance beam. If you get a tax break on one end, what is the deal at the other end. So if your account grows tax free, there will probably be a tax hit when you withdraw. Or you may be able to have the $$ withdrawn in a childs name in the case of an education plan. The child would be in the cheap seats for taxation.
Use your own logic when deciding what to invest in. Do you think the US is on a growth cycle? The current accounts are in deficit, the trade balance is in deficit ( big time ) and the future liabilities ( social security system ) is underfunded. So if growth is not happening what should we do. Look at the value side and maybe only buy companies that can make money regardless.
In Canada that means the banks, insurance companies and such. So a Canadian dividend fund would work well. But do not make a long term investment if you may need the money next month.
To cover my butt I must tell you that the markets may go up and they may go down, and they will go down for sure on some days.
I own mutual funds in Canada and so do my clients.
The above is for general information only.
Michael

[Wukong]

There are ways to access your IRA's or 401(k) prior to age 59.5 without paying the penalty . Your tax advisor, accountant, or financial advisor should be able to help you out in this area.

One way is to set up a system of periodic payments (ie annuitize the fund). Depending upon how much you would want to withdraw, you could split up your account(s) and transfer a suitable amount to an IRA set up specifically for this situation. Caveat,,,,,, I am no longer in the financial services business and I know if I make a mistake here someone will be all over me like a duck on a June bug.

But, several years past my brother=in-law moved from the US back to his home in Taiwan. I had his accountant set up a withdrawel schedule for the maximum amount so that he did not generate any taxable income. Since he was working and living overseas and subject to the overseas exclusions, he was (is) able to take money from his IRA prior to age 59.5 without either income tax or penalties.

Some current swindler of widows and orphans (ChFC or CFA) can chime in and bring this concept up to date.

[BC Mike]

You were doing quite well until the last line. Refferring to a CHFC or a CFA as a current swindler is probably not appropriate.
Domicile is a complex issue. Changing it ( moving to another country ) is a big event and there are many things other than taxes to be considered. Health care becomes a major issue for folks as they get older. The amount of money spent on it in the last few years of life can be quite staggering.
Michael

[Jim H]

It's interesting that some people I talk to would never even think of cruising because of the "health care" issue. They feel they'll need the 500k to 1 million in their future IRA accounts just for the multi-K a month health care insurance and costs. Sailing a boat before that having all that paid in advance would be fool-hardy, they believe

Meanwhile, successful cruisers seem to find alternatives, either in catastropic coverage, and simply "payiing cash" as they need health care as they go. However, there might be "disaster stories" concerning lack of coverage of cruisers that we never hear about.

All of it is worthy of concern, but I'd like to think there's a solution for someone who wants to start cruising in their mid-fifties instead of mid-sixties.

[capt lar]

jim - i have followed this thread without comment because my primary reaction is, you probably aren't going anyway.

"we might use these accounts to fund one or two smaller boats as we age, and then a larger boat when we are in our mid fifties to cruise full time on. We would "bank" on pulling the interest on the account at age 59.5 to help fund our cruising until we start tapping into our main 401ks when were in our mid-sixties."

while none of us know what life will bring, and certainly financial planning is important, you make the assumption that you will have the money, have your health, not be caring for a parent and be free as a bird at 59.5.

i gotta tell ya - it only gets more complicated as you get older. i do not mean to sound critical, but rather want to offer some free advice (which dad used to say is often worth what it cost) and tell you to go buy one of those "smaller" boats now.

owning a boat is an irresponsible and financially unsupportable decision. there is not rational reason to buy a boat. boats are a waste of money. your CPA will not approve of a boat purchase. your mother will be unhappy. do it anyway and get on the water before life takes the opportunity away. at least then when your are 59.5 after your kid dropped out of school, your wife dumped you, your health failed, you lost your job, your teeth fell out and your dick stopped working, you can sit there gumming your teeth and say "wow - i really lived when i was out on that boat"

capt. lar

[GordMay]

Capt lar must have been thinking of Maggie & I, when he wrote ”buy one of those "smaller" boats now -...- at least then when your are 59.5 after ... your teeth fell out and your dick stopped working, you can sit there gumming your teeth and say "wow - i really lived when i was out on that boat".

He pretty much describes what I did then, and now do.

[Jim H]

Instead of being offended, I'm smiling. Of course I'd like a wonderful bluewater boat right now. In fact, my wife says she's ready to live aboard now, not in 15 years (when we're 56).

We just got done restoring a Cal 20 over a three month period (woodwork, epoxy, keel, decks, running rigging, the works), just for the experience of learning the skills. We sail it or slightly larger club boats (up to 27 feet) on a weekly basis.

This weekend we're taking a close look at an Ericson 27 in very good shape as a possible "interim" boat for the Columbia River and Puget Sound, as well as an Islander 28, though we wouldn't mind a nice 30-32 footer already. We might share this interim boat with another family to reduce costs.

Anyway, I'm envious of what you've done, and we might talk ourselves into it yet, but we do feel we need to be resposible for our two kids (6 and 8). We need to think about their possible health needs, and we need to have something saved to help them with college costs. (Others can disagree, of course.)

Some say to buy a big boat now, others say don't until you need it.

I think the book Sensible Cruising: The Thoreau Approach stated it best-- if you want to cruise, go crusing right now to the extent that you can. For us, that means 2-6 weeks a year if we really want to (if we own a suitable boat) or one or two weeks a year if we charter. We're happy to charter for a year or two, or look into less-expensive coastal cruisers for a family of four, but maybe not the Pacific Seacraft or Halberg Rassy yet. We've already enjoyed overnighters (as a family) on boats as small as 23 feet.

You're 100% correct that boats are a terrible investment of money. I'd like to think, however, that there are ways to "do everything that one can now" while also saving for something larger and longer in the future. If we don't "bluewater" for some time (other than sailing with others), then it likely better to have a saving plan and not overspend on interim boats.

Thanks again!

Jim H

[Vasco]

Jim H,

Go before the kids become teenagers.

[capt lar]

ah jim - there is hope ! and you have a smart and willing wife. excellent. simply ignore those practical friends and let the forum corrupt you.
i don't think you could find a sailor that felt their time and money spent on boats was a bad decision. i know many that lament over having to give it up. i also can't think of a better way to provide for your kids' health and education than to teach them about boats. self sufficiency and self assurance are life skills earned and i know they are a part of what makes my kids willing to take a chance and find success. they remember the times and look forward to more adventures. it gives them confidence. it bonds a family.
vasco is right with the age of kids issue. now is a great time to have a coastal cruiser, especially when you know that this time is limited. once the kids hit 12 or so, you will lose your crew.
(i'm also an expert on college costs - kid #1 just finished her masters, one more payment on kid #2 undergrad, and then #3 starts in another year - i could write a book - we all find a way)
capt. lar

[Vasco]

capt lar,

You know I wasn't kidding about the kids. I first took off in 1990, my boat was a 88 CS which we bought in 88, the first time my youngest daughter saw that boat was when she came down to our going-away party! She was going into first year, we left her at home, car etc., but with a small budget. When we came back a year later she was complaining about the cost of toilet paper and, of course, the house was a mess! Go before they're teenagers. Boat kids become amazingly self-sufficient.

[Lightfin]

Right on Capn Lar!!!! I echo almost everything you said.

I vote that, within reason and with as little debt creation as possible, squeeze out sailing "adventures" for your family now and as your kids grow.

Some of our children's best memories are our charter sailing weekends and weeks when they were in junior high and high school; and naturally they are some of my best memories too. At the time, there were many of those charters that I feared were too great an indulgence and expense, but we "found a way to pay," and the financial worries fade, but the "great times memories" remain.

I vote too that you save/invest what you reasonably can for college etc., but don't sacrifice "all" for it. Too many things can happen; there "may" be scholarships, your child may end up not going for higher ed right away, and there are always parent and student loans, and I'm an advocate of the kids earning and paying some of their own expenses too.

Strike a wise & healthy balance, but don't exclude a good measure of Carpe Diem!!!!!! (in my VERY humble opinion!)

[Catamount]

When I was a kid, my parents bought a Paceship PY23 trailerable "cruiser." Going out for a couple of week-long cruises each summer, our family of five (us three kids occupied the V-berth) cruised the entire coast from down-east Maine to Long Island. The culmination of these trips was an "offshore" passage, with my Dad, my uncle, and my cousin, from Saco, ME to Yarmouth, Nova Scotia, and back to Bar Harbor, ME. I must have been 14. I have many great memories.

This purchase was made with the intention that when it was time for us kids to go off to college, the boat would be sold and the proceeds deposited in the college fund.

Certainly, boats are not an "investment," but that doesn't mean that they don't still have some monetary value when the time comes to sell them. If I recall (I was still a kid), we sold the PY23 for close to what we paid for it (of course the value of a dollar had declined due to inflation over the time we owned the boat -- this was the mid 1970's).

As it turned out, regarding my own college costs, my parents paid one-third, the college paid one-third (through a financial aid scholarship -- i.e. a discount), and I paid one-third (through a work-study job and student loans).

Good Luck,

Tim