Q. I have a few questions about a first time home purchase. I'm a single 28-year-old male making $4,500 a month. I'm looking to purchase a home in Ohio for about $135,000. I currently rent a condo for $800 a month and have a $286 car payment for 26 more months. I'm virtually debt free except for monthly bills and a credit card bill, which I pay off each month.

Currently, I have $4,000 in checking, $2,000 in savings, $1,650 in a Roth IRA and $25,000 in a traditional IRA. I switched companies last year so I will not be eligible for 401k until this summer, at which time I will contribute 10 percent.

I also plan on contributing $2,000 a year to the Roth IRA. I hope to roll the traditional IRA into a Roth someday. What do you think? It is probable that I will receive a cash "gift" of about $6,000 to $8,000 for a down payment. What are my best options?

---C.B., Findlay, OH

 

A. First, give careful consideration to becoming a homeowner because the tax benefits won't be as large as you'd like to believe and the transaction costs for selling can be damaging if you sell in a short time.

Let's work through the numbers. While your price range is prudent, the monthly payment on a $121,500 mortgage (the amount you would borrow after a 10 percent down payment) is $891.52 if you can borrow at 8 percent for 30 years. That will give you interest deductions in the first year of about $9,700. If the real estate taxes are 2 percent of the sale price (a typical rate in much of the country) you'll also have an additional deduction of $2,700 for a total of $12,400.

Most people thinking about the tax benefits of home ownership multiply this number by their tax bracket, often 28 percent, and figure their tax savings will be $3,472 a year or nearly $300 a month. In fact, a single tax payer has a standard deduction of $4,400 (versus $7,350 for a married taxpayer filing a joint return) so the actual tax benefit net to $2,240 or a bit less than $200 a month. (Only itemized deductions in excess of the standard deduction will reduce your tax bill.)

In your case, the tax savings, even at only $200 a month, will work to offset some of the expenses of owning such as a higher mortgage payment, insurance, and real estate taxes.

My suggestion: if you have to empty a Roth IRA account to get the down payment and closing costs together, delay buying. Don't, however, worry if you can't make a Roth IRA contribution in the first year after buying.

 

Q. My financial planner is advising me to buy a Variable Universal Life policy. I'm 41, married for 17 years and have a 12-year old boy, an 8 year old girl, and a 1 year old baby. I have an education trust set up for the kids, funded monthly. My home is paid for. I have no personal debt or business debt. My business grosses $5 million a year.

We have a SEP that my wife and I are contributing $24,000 a year to and a Variable Annuity account worth $50,000. I quit funding this 2 months ago. I have $250,000 in a money market account and make about $750,000 a year.

The planner would like me to invest $60,000 or more a year in this VUL so I can have income for life of $600,000 starting at age 66. I tend to be conservative but I do take calculated risk. Is the VUL really something I should get into?

---R.B., by e-mail

 

A. Is this your financial planner or is it a life insurance salesman? You might ask how much of his income comes from products other than life insurance. My bet is that it isn't a big number.

It bothers me to see aggressive investment plans linked with life insurance purchases. There are three reasons for this.

•          It is now possible to buy highly competitive 20-year term life policies               at rates that are lower than the cost of life insurance inside a VUL               policy both at the start and later, as the cost of life insurance inside               the VUL rises year by year.

•          The VUL policy commits you to life insurance investment products that               tend to have higher expenses than investment products from other               sources.

•          It can be expensive to quit a VUL policy with a large accumulation               because you will have accumulated a tax liability.

Instead, ask the salesman to address two questions: How much life insurance do you need to protect your family in the event of your death? What is your exposure to estate taxes and what can you do to minimize them?  These questions, not retirement income, are the proper context for life insurance.