Don't put in that pool until you're out of debt, then save and pay cash

Dollars & Sense

September 15, 2002|By Liz Pulliam Weston | Liz Pulliam Weston,SPECIAL TO THE SUN

We would like to put in a backyard pool, which will cost $24,000. We are refinancing our house to incorporate the payment into our mortgage. But our broker told us he may be able to get us only $13,000 on top of our mortgage because of my husband's heavy student loan debt. We can't do a home equity loan because our house is only 2 years old and we don't have enough equity built up yet. Is there another course of action we can take to help us get the pool?

Yes. You can wait until you can afford it.

Lenders today are more than willing to let you borrow more than is good for you. So if you're running into trouble, you know your situation already is out of hand.

Besides, you shouldn't be borrowing money to pay for a luxury - and that's what a pool is. In most areas of the country, a pool won't add much value to your home and may even detract from the sale price, because many buyers won't want the hassle or danger pools can pose.

Pools are typically more valued in climates where they can be used year-round, as in Southern California, but you still shouldn't expect one to add much value to your home. Such is the fate of most home improvements, from fancy kitchens to new decks - they begin to date almost immediately. And you don't want to borrow money to pay for something that's going to depreciate.

Concentrate on paying down those student loans. Once you've got those under control, you can start saving so you can pay cash for your pool.

My husband spent eight years and $45,000 building an experimental aircraft, which we now wish to sell to finance a new business. We've weighed the pros and cons of selling something so near and dear to our hearts, but we think we can get $70,000 if we sell it. The advantages of having that large a sum to help us move in a new direction far outweigh the luxury of flying instead of driving to weekend adventures. But we're concerned about taxes. Would we have to pay any on the sale, and how much?

Congratulations for being willing to sell an asset to fund your new venture rather than going into debt. Every pilot alive knows how tough it can be to part with a beloved plane - particularly one you built by hand. You and your husband obviously spent a lot of time clarifying your values and deciding you're willing to make the sacrifice.

You will have to pay some tax when you sell the plane, as you'll be making a profit on the sale. The good news is that your $25,000 profit will be taxed at the more favorable capital gains rate of 20 percent, plus whatever applicable state tax applies, rather than at higher income tax rates. That should still leave you with quite a nice amount to launch your business.

You'll want to make sure you can prove your tax basis, or the amount you spent building the plane, said Bob Trinz, an editor of RIA's Federal Taxes Weekly Alert. The Internal Revenue Service will require that information if you're ever audited. Hopefully, your husband kept all the receipts for materials and supplies he purchased along the way.

You recently answered a question about how long 401(k) statements should be saved. You said most people didn't need to save their statements unless they made after-tax contributions or had company stock in the plans. But what about 403(b)s? I seem to remember that funds deposited in these accounts before Jan. 1, 1987, can qualify for special treatment at distribution.

You're right. Although 403(b)s are similar to 401(k)s, they're not quite the same. Here's one aspect in which they differ.

With 401(k)s, you're generally supposed to start withdrawing money in the year after you turn 70 1/2 . Money deposited in 403(b)s before 1987, by contrast, doesn't have to be withdrawn until age 75, said Peter Weinberg, an expert in pension law at TIAA-CREF, which manages teacher retirement funds. Those few years can make a big difference in increasing your nest egg.

So if you made contributions to your 403(b), you'll want to hang on to your old statements to prove that.

You also should know that you can delay distributions from a 401(k) or a 403(b) indefinitely if you're still working for the employer that provided the plan. Not many of us plan to be working past age 70, but those who do can continue to leave their savings untouched.

Liz Pulliam Weston is a columnist for the Los Angeles Times, a Tribune Publishing newspaper.

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