I am being told that Liveaboard Boats loans are now impossible

[TacomaSailor]

The ROTH -vs- conventional IRA is a consideration I ignored during all the years building up to retirement. I just ASSUMED that our retirement income, and therefore marginal tax rate, would be lower than during our working years.

While my wife and I were still members of the working class - I never did studies, scenarios, or simulations ( I was a highly paid computer geek and that was the way I thought!) to determine where our self managed retirement funds would be, in terms of federal tax, once we quit working and were living off a mix of social security, pensions, and our IRAs.

I did not take into account that the fact that our IRAs might grow must faster than expected and our post-retirement expenses might be much lower than expected.

I did not consider the need for a couple large IRA withdrawals during retirement that would push us way too high in the IRS tax brackets.

I was very proud of the fact that our investments grew tax free and that led me to ignore the fact we might want to use that money while our fixed income retirement income already had us in the upper reaches of what I consider the "maximum personally acceptable tax bracket."

In retrospect I sure wish I had put about 50% of our retirement savings into a ROTH account during the last 10 years of my wife's working life. At that time I was not working much so we could have paid tax, again at my "maximum personally acceptable tax bracket", on the deposits we made into the ROTH. We we could now use those ROTH funds, tax free!, for useful things - like buying a bigger boat.

It all so simple and obvious 20 years ago! Hubris, I read and studied about IRAs, pensions, social security, and retirement planning, and figured I knew everything I needed to know. While we were working I was avoiding payment of taxes and never bothered to talk to a professional planner about the tax problems we might encounter while trying to use those IRA funds on which we had not yet paid taxes.

Now, we get to pay even more taxes to use those IRA funds.

I guess it really is true "Sometimes we don't even know what we don't know."

[BandB]

Originally Posted by TacomaSailor

I guess it really is true "Sometimes we don't even know what we don't know."

I still wouldn't go so far as to say you should have paid taxes on some and not put it into tax deferred. You earned income on the taxes you didn't pay. Taking a simple example, let's say a 28% tax rate. For every $100 you saved you would have only saved $72. Now that extra $28 has earned money all those years. Far more than the difference between tax brackets. Let's just say it's been in there 15 years at an average increase of 4%. It is now worth $50, so it earned $22. That is far more than the difference in tax rates, even if it pushed you into a 33% of 35% bracket now. The $22 of course has taxes so let's say post tax you earned $14. Well, the difference in tax rates is only $5-7. So you still came out ahead by deferring the taxes and having income on the deferred taxes.

So even more important than delaying having to pay the taxes was the ability to earn money on the tax money.

[BandB]

Only you can decide what is of most value to you and peace of mind is of great value. I honestly think the thought of reducing your savings is hitting you as much or more than the tax penalty at this point. Having that money still there, even if not using it, can be of great emotional value.

If it was only the tax difference bothering you, then I'd say you might consider removing it over two or three years. In that case you'd be talking about a tax penalty of only one or two brackets, so 5-8%. That's sales tax in some states that tax boats. And also it's no more than the inflation in boat prices over a three year time frame of waiting. Still the huge change is that you're moving money out of an income producing account into a depreciating and income grabbing account called a boat.

Seems like you've reached a solid decision for you and I applaud that. We all conclude differently. My wife and I were savers over the first ten years of our marriage and many didn't understand. But we felt better having the money saved and put away than we ever would have felt about having a bigger, more expensive home. There were people we worked with who were in lower income brackets and purchasing homes that cost 5 to 10 times what ours did.

[DsquareD]

For those who are confused about the tax consequences, taking money from a retirement account isn't always straight forward. Even after reaching an age where early withdrawal penalties no longer apply.

Any amount taken from a tax deferred account is considered taxable income at regular rates in the year it is withdrawn. If one is taking an amount which allows them to stay under the next higher tax bracket, then any additional withdrawals that year will be in the next higher tax bracket. Very simple concept.

You don't even have to be a 1% rich person to experience this. Simply work and save for 30 years or so and you too could easily be there.

So getting a loan to spread the withdrawals out over several years might make sense for some people.

If you are simply selling your house, that you lived in for 2 out of the last 5 years, to buy your boat this whole concept of taxes might not be an issue for you. You'll have to consult your own tax professional on the best way to finance your boat. However, the OP has very legitimate concerns and doesn't really owe any of us detailed explanations on how his specific tax situation came to be.

I'm glad he made the post, as I'm in the process of planning my retirement now and if certain criteria are met it could happen in 1-3 years. But taxes, earnings, insurance, housing and a few other variables all have to be considered and planned for.


Dennis

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[SV THIRD DAY]

Good points Dennis...
Just wait until people find out about the Obamacare 3% hit they will take when they sell that home to go cruising...hahahah

[hellosailor]

Tacoma-
One thing you might want to check out, as this tax year is coming to a close.
It might pay for you to roll some assets over into a ROTH, paying this year's rate on them, so that they would be available to you for the boat purchase next year. As opposed to accessing everything from the IRA at higher rates next year. Dunno, but it might, sometimes it pay to "Rothify" up to the next bracket break instead of going over it to the next higher one on the following year.
A lot of people "Rothified" money in 2013, anticipating that federal tax rates would go up this year and they'd win by paying the taxes up front at last year's lower rates. When that didn't happen, they "unRothified" and rolled it back into IRAs with no penalty, no conversion losses, no tax consequence at all so long as they did it before April 15th. It can be worth doing anytime you anticipate the next year's federal tax rates are going to go up, and you are well under a bracket increase.

"HOW does us renting a place provide any security at all to the bank?"
Banks stopped addressing reality long ago. They follow codes now. So if they say "residency is proven by...." and you meet that criteria, the reality of it doesn't matter. this isn't "It's a Wonderful Life" and the loan officer isn't going to look into who you really are or aren't, they just check the boxes and tally the points.

"And, the issue of a boat being a mobile collateral object..."
There you go, letting logic get in the way of the tally boxes again.(G)


"\The potential lenders want us to show a "history of regular withdrawals" from those IRAs. "
I'd suggest just giving them the IRA statements for those years. The funds presumably have been re-invested in the IRAs to a large part? OK, no withdrawls is still your withdrawl history, they may not even look at the numbers. But the tally boxes say....You know?

And as mentioned, mutual funds are Uninsured assets with zero guarantee, while deposit notes are insured and guaranteed by the FDIC up to $100,000 (more now?) per account. And in any case, nowhere near as volatile and vulnerable. Again, the tally boxes say....

The bad news is that the mortgage frauds have added more layers of regulations and made more people more cautious. The GOOD news is that the same banks and finance houses are now recovered enough so that they are finding new ways to cheat. Apparently sub-prime car loans, designed to force foreclosures on high end cars, and really common now, and with the home market being watched so much more, creative minds may turn to boats, too.

There's bound to be a way to make your boat happen. You just need to find a real loan officer, not a drone worker bee, and find out how their tally boxes must be checked. A marine lender or credit union (where your IRAs would probably be considered real assets if they were in that credit union) probably is the best way to go.

Meanwhile, DO look into a "precautionary Rothification" to see if that might benefit you. It costs you nothing, if you follow the rules and the cut-off dates to unRothify if that works out being the right way to go. But it can buy you time.

[DsquareD]

Another good reason we should each have our own tax consultant (I currently only see mine about once a year, but more in the past).

All the tax codes and different retirement vehicles don't have a one size fits all application. Nor is there any easy blanket answer that is universal.

For instance, converting to a Roth IRA sounds simple enough and might be a great choice for some if they can get the timing right. HOWEVER, there is a holding period or look back window in which withdrawals revert back if taken during that time. When I met with a financial planner just yesterday (we're rolling over one of my wife's plans) he said it was 5 years.

So be careful where taxes are concerned and consult a professional.


Dennis

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[hellosailor]

I can't swear by it, but the "lookback" period you are referring to may have nothing to do with the conversion itself. But rather, there are sometimes time periods regarding how long funds have been in an account before they can be used without penalty. So if funds had to be in a Roth for a minimum of five years before a qualified distribution...sure, freshly converted funds might not count.

Dunno, but I'd bet the IRS' toll-free phone staff could answer that one, and cite the free online PDF guide that lays it out. It's always fun to explore the IRS code, isn't it?

[BandB]

Originally Posted by hellosailor

Dunno, but I'd bet the IRS' toll-free phone staff could answer that one, and cite the free online PDF guide that lays it out. It's always fun to explore the IRS code, isn't it?

Taking advice from their "toll-free phone staff" is about as dangerous as taking it from a cruising forum. But their web site is very good and pretty easy to find the topics there.

[Miniyot]

Originally Posted by Scot McPherson

Maybe you ought to consider asking a tax lawyer if buying the boat can count as buying a house. That would be a transfer of your investment rather than a withdrawal from your investment accounts. But talk to a tax lawyer first.

.

Originally Posted by Hudson Force

My guess would be the tansfer of a large sum from a tax deferred account that would make the boat purchase price also taxable income. I've had some experience with the IRS recognizing a vessel as a primary residence. If one had no other primary residence at the time of purchase (former house sold) could this represent a tax advantage?

30 years ago I cashed in a % of my retirement for my 2nd sailboat. I did not have to pay the 10% penalty as the boat qualified as a home.

[hellosailor]

Varying with the specific type of retirement account, and as I recall your age as well, it was/is possible to take some money up to a specific dollar limit for the purpose of buying a home (among other things) without a penalty. But there's no need to pay a tax accountant to find out the specific details. They're all available in free publications from the IRS, or on their web site.

In the broadest terms, no, you can't just empty a retirement account without penalty to buy a home of any kind. But with specific conditions and limits, yes, you can.

The IRS is also very clear about what a home is and isn't. If you've got a galley, a head, a mattress, and you live there? It's a home. That one's also easily documented on the IRS site.

[TacomaSailor]

As others have mentioned - using money in IRAs can be complicated.

However our issue is simple!

Every penny in our IRAs was deposited there over the last 35 years with NO federal tax paid on those pennies.

Every penny of growth (lots of pennies!) has also grown tax free.

Now, when we withdraw any money, we have to pay Federal tax on that money at an ordinary income tax rate. That is fair and simple.

It is not possible to avoid the ordinary income tax!

It is possible to manage the tax rate by withdrawing an amount each year that keeps our total income in the tax bracket that makes us comfortable.

There are no schemes or methods of avoiding that ordinary income tax.

We do not have to worry about early withdrawal penalties because I am an old fart and my young wife's plan was structured so there is no penalty for withdrawing money prior to 59 1/2 years.

[hellosailor]

"It is not possible to avoid the ordinary income tax!"

AFAIK, no. Not under any circumstances. Remember the premise of the IRA was that you would pay no tax "now" and all tax "later". Well, now has become later.

What you CAN do is try to juggle the distribution across multiple tax years, i.e. tax out enough in late December to push you to the top of the next bracket this year, and take out the balance in January, when it pushes next year's bracket. Sometimes doing it that way will still keep you well below the bracket that one distribution would have put you in.

If you have any equities with short or long-term capital losses, sell some now also, and take the loss. You'd need to check with your account to see if that's capped at $3000 vs ordinary income, or you can get away with more, depending on what the IRA assets are.

If you are using a full-time professional for your taxes now, make an appointment while things are slow, now. If not, find a full-time CPA or tax attorney and again, while things are still slow, buy an hour of their time. In the worst case you'll spend maybe $150? but at least you'll have professional advice, based on the specifics of your situation. They might (might) even know a lender that could work with you on this. Maybe a short-term (13 months) unsecured personal loan could put your withdrawl into a third year as well, to spread the brackets even lower? Or maybe you could find a "partner", who would own half the boat, on paper, with the partnership agreement requiring you to buy out their half over five years at six percent interest. Which is less than they'd get in the market but more than they'd get on CD's or quality bonds. A CPA might have some ideas, and some contacts, for a creative arrangement.

[DsquareD]

Originally Posted by hellosailor

Varying with the specific type of retirement account, and as I recall your age as well, it was/is possible to take some money up to a specific dollar limit for the purpose of buying a home (among other things) without a penalty. But there's no need to pay a tax accountant to find out the specific details. They're all available in free publications from the IRS, or on their web site.

In the broadest terms, no, you can't just empty a retirement account without penalty to buy a home of any kind. But with specific conditions and limits, yes, you can.

The IRS is also very clear about what a home is and isn't. If you've got a galley, a head, a mattress, and you live there? It's a home. That one's also easily documented on the IRS site.

No, the IRS is not very clear. That's why there is an entire profession dedicated to figuring it out. Even two IRS agents in the same office can disagree.

That's why it's important to have a good tax preparer, CPA, and/or tax attorney who can give an accurate interpretation of the tax code and more importantly be able to defend it in case of an audit. Just saying you called an 800 number isn't good enough. I am not wealthy, but I pay my tax guy to protect me.

Everyone's situation is different. If you feel comfortable reading and interpreting tax code, that's great or call the IRS that's great for you. I wouldn't expect others to do it though.


Dennis

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[BandB]

Originally Posted by DsquareD

No, the IRS is not very clear. That's why there is an entire profession dedicated to figuring it out. Even two IRS agents in the same office can disagree.

Everyone's situation is different.
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That last sentence is perhaps the key. One time a friend of my mom's recommended my father, who was a CPA, to her father. So here's how the phone call goes.

CPA: Hello
Caller: Identifies self and then asks a question.
CPA: "If you'd like to come in and discuss it, I'll be glad to help you."
Caller: Repeats question.
CPA: "Well, I don't really know without looking at your complete situation."
Caller: Another question
CPA: "I'd need to sit down and discuss it with you. I don't know without getting more information."
Caller: Another question
CPA: "I just can't answer, can't really know without more information."
Caller: "Well you sure don't know much."
CPA: "No, not a h... of a lot. But if you'd like to come in and talk I'd be glad to help you.

The point is that one little small thing can mean such a difference. When I was 16, I was very disturbed because a tax return prepared correctly indicated a huge penalty for underpayment of estimate for one of his clients. Everything done by IRS rules and instructions but still shows penalty of $40,000 or so. So, I set about research. Go through all of Prentice Hall, all of Commerce Clearing House, all of IRS site. Finally in one large strange book in my father's office, I find one paragraph referring to this exact situation and a tax court ruling. We referenced that ruling and attached a copy of the document. No penalty. The IRS didn't publish and make that exception official for another five years.

My father once had someone come and tell him he'd like him to take over. Reason was he'd just been sent a bill for $80,000 and his accountant just said "Well, I knew it might have trouble, but it was worth a try. I'd pay it." My father insisted on looking and then was convinced the other accountant prepared it correctly, but just lacked the confidence or conviction. Bill reduced to $1200.

Should it be simpler? Yes. But it isn't. The slogan in the profession was "Everytime congress simplifies the taxes, that means we'll have much more work."

The rules change constantly too and if one isn't immersed in it full time, then they can't be aware of all the changes. I spent my career in industry, not public accounting even though I had a background, degree and certification there. I would never do all my own tax work without someone else consulting and/or reviewing today. Spending a few hours a year, I cannot possibly be as well informed as they can be.