Michael: The Nitty Gritty

The sun and the stars
Are so much brighter when seen
From a dark dark place.

Thursday, October 21, 2015

The loan application process for a loan against my tax shelter annuity was very straight forward. I was given two choices for the length of the loan; 5 y or 10 years. The 10 year period is only allowed for home loans. I checked the 10 year box and, it seems on my good faith alone, the application will go forward. To my surprise, I’m not  required to show any documentation that the loan is for the purchase of a primary residence. That could’ve been a major complication as the loan is technically not for the structure but for the land. And though I feel that’s an integral part of building a house, that doesn’t mean a loan officer would see it that way.

Now for that quick announcer voice over part that details all the different ways this drug could totally mess up my life, except he’s talking about a loan instead of a drug.

This is not an interest rate free loan. I am being charged 6%. Additionally, they are setting aside a reserve account in the amount of 110% of the loan so there is virtually no way to default on this loan. If I were to default, the loan would be paid off from the reserve account and whatever amount hadn’t been repaid would be reported to the IRS as income and taxed appropriately.

The reserve account does continue to draw interest at a guaranteed rate of 4% and not at the rate of the rest of my retirement account, which is tied to the stock market. Of course if the market tanks or lies flat for 10 years, having money set aside with a guaranteed interest, might not be such a terrible thing. But historically, I’m on the losing end of this deal.

Subtracting the loan and the reserve account, the rest of my tax sheltered money continues on the roller coaster ride that is the stock market.

To illustrate how this works using simple numbers; let’s say I have $50,000 in a TSA. I borrow $10,000. The set aside in the reserve account would be $11,000. That would leave $29,000 in the balance of my TSA account. After 10 years, or when the loan is paid in full, my money will be reunited and continues to grow as one investment. 

Once I get a loan from a Panamanian bank to fund the construction of our house, I’m considering drawing a small amount annually from my TSA to pay the annual TSA loan amount. But now I’m getting way ahead of myself. One step a time.