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Just before the Enron scandal broke, the company’s CEO immediately put his money into annuities — in his wife’s name.
Why? Because those assets are creditor-protected, so they can’t be seized (in this case, by the government).
This is just one example of many — remember the 14-percent tax rate Mitt Romney paid on his $13 million income? — illustrating how extremely wealthy people get the most from their money. And, most of them do it legally.
Much of their success comes from knowing where to find loopholes in the financial system — “hacks,” if you will. While we would never recommend any illegal or dishonest money moves (seriously, don’t break the law!), there are a handful of legal personal finance hacks that are available to all of us — like these incredibly useful, low-profile tricks.
Borrow against your home’s equity
This hack is for homeowners, but it’s good for everyone to know about should you ever decide to buy a home.
How It Works: Instead of having the bank front you the money you need through a personal loan, you borrow against your home’s equity. (As a reminder, equity is the difference between the total of your mortgage and the appraised value of your home.)
The benefit here is two-fold: Since you’ve already been approved for a mortgage, the process will be less involved for this loan. You’ll need to get your home appraised, but your lender should be able to walk you through the process. Second, interest payments on home equity loans are typically tax-deductible, unlike interest on personal loans.
Lenders probably won’t give you an amount equivalent to the entire equity — you’ll get more like 75 percent, at most. But if you have equity of $100,000, that’s $75,000 you may be able to borrow. This is a great option if you’re planning to stay in your home for a while, and your home is worth more than what you paid for it.
If your home is worth less than your mortgage, you have little equity or you’ll be moving soon, this hack is not for you. And, a word of caution: If you go this route, you must be vigilant about making timely payments on your loan — since you’re borrowing against your home, you could lose it if you fall behind on those payments.
Pay down debt using a zero-interest credit card
For this hack, you need either a respectable credit score in order to apply for a new card or an existing credit card with zero interest.
How It Works: The most insidious part of carrying a large balance on your card is the interest that you’re paying on that balance, which can be as much as 20 percent. With this hack, you’re making a balance transfer to another card to avoid paying that interest.
This maneuver only works with cards that don’t charge interest. Luckily, many credit cards offer an initial promotion of zero interest for up to 18 months when you open a new card. If you’re carrying considerable debt that you intend to pay off within the 18-month period, you can do a balance transfer (essentially, you’re paying off the interest-bearing card using the new card, so your balance appears on a new bill) to pay down your debt without interest.
There is a charge for the balance transfer — usually around 3 percent of the amount that you’re transferring — so if you have a very small balance on your card, this might not be the hack for you. The idea is that your would-have-been interest payments cost more than the balance transfer fees. You can figure out how much money you’ll save with this maneuver by using a credit card balance calculator. Note that your credit score will get dinged when you open a new card because you’re changing your utilization rate, but in the grand scheme of things, this ding doesn’t compare to the full-on wreck that is major credit card debt.
Use a Roth IRA to save for college
This hack is useful if you’re saving for a child’s college tuition because it gets around the limited use of 529 accounts. That said, Roth IRAs do come with income limitations: You can contribute to a Roth IRA to the limit if your adjusted gross income is less than $112,000 filing alone, and $178,000 if you’re married filing jointly, so consult your tax advisor before giving this idea a try.
How It Works: A 529 plan is a state-run college savings account. (You can look into the particulars of your state’s program here). It’s not federal income tax-deductible (although some states let you to deduct some of your contributions on your state income taxes), but it does allow you to pull out funds for college tax-free. The downside of a 529 plan is that if and when you apply for financial aid (by filling out the FAFSA form), the money in this account is considered part of your family’s assets. For some families, having savings in a 529 counted as an asset lessens the chances of getting financial aid.
One of the things that we say again and again is that you shouldn’t take money out of a retirement account. There are penalty fees, and it’s basically self-sabotage … with one exception. That exception is withdrawing the principal — the money you contributed, and not the interest it has earned — from your Roth IRA.
We don’t generally recommend this maneuver, but if you’re in a tight spot, it might work for you. Money saved in retirement accounts doesn’t count toward a family’s assets, so you can save money for college in a Roth IRA, apply and possibly qualify for financial aid without declaring those assets. Then you can simply withdraw those savings when it’s time to pay. For example, you and your spouse could each contribute $5,500 (the maximum contribution for 2013) for a total of $11,000 a year. In 15 years, your principal will be $82,500, which you can withdraw to pay for college without penalty.
Something else to know: Retirement accounts are generally creditor-protected, so they can’t be seized by creditors. With 529 accounts, the rules vary by state.
Continue reading about useful financial tricks on LearnVest.
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- Your March Financial To-Dos
- 8 Tips to Lower Your Taxes During Retirement
- Mortgage Shopping for Those With Student Loans
Note: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinion or position of Zillow.
- Banking & Budgeting