Withholding on Upront Loan checks

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Nov 14, 2008 3:03 am

I've probably narrowed down between Wachovia & Morgan.  The upfront is 125% & 100%.  Back end kicks in after month 14 (or sooner if i hit the number of assets tfrd sooner) = also forgivable loans.

Question:  How do they handle the withholding on those front checks?  I would presume that it would be little to nothing, until it is forgiven each year.  If so, i guess  it would make sense to buy zeros to coincide w/each years liability?  Thoughts or experience anyone??  Thx.

Nov 14, 2008 6:10 am

Correct, check is tax free originally, at Wachovia they put the money into a brokerage acct, from there, you do what you want.  The money is "forgiven" monthly, with modest interest on each amount.

 
For example, a 12K bonus forgivable over one year = 12/12=1K per month on your paycheck in extra taxes (plus interest). 
 
In my opinion, the monthly tax hit sucks, but is typically managable, so find something secure, but it does not have to be zeros, seeing as how yields are so low.  Make sure you have enough liquid to pay month to month bills, and then use CD's to handle the rest.  You can get a one year CD at 4% right now, while a 1 year zero gets you squadoosh.  That is how I handled mine, but to each his own.
Nov 14, 2008 6:32 am
duster10:

That is how I handled mine, but to each his own.


Good work, duster.  No doubt you know of some, like I do, who invested their whole loan in equities just before the market started its nose dive.  I even remember one guy doing that while insisting he was going to leave in 6 months and would simply pay back the loan and pocket the big gain he was sure would be inevitable.  No wimpy CDs for him!  Needless to say, he is still there, wanting to leave but locked in since he cannot repay the loan. 

Another had a similar idea, but thought he'd play it safe and invest short term in auction rate securities, right before the auctions started to fail.  His short term investment turns out to be a muni that doesn't mature for 10 years, and the only way to get out now would be for a loss of about 35%. 

Who knows how widespread these stories are? 

So the main advice for those looking at new loans is not to let the tail wag the dog.  This is money you do not yet own - you are just holding it.  Until you've earned it and it's yours, invest it accordingly.  You never know what tomorrow will bring.

Nov 14, 2008 6:50 am

I was thinking of doing the same for the early money, and for the last few years, buying an assortment of TR closed end funds (with no leverage) and slap those puppies on div reinvest.

Nov 14, 2008 1:33 pm

what about buying some real estate at these levels...

Nov 19, 2008 3:00 pm

Easiest way to figure that out is take the gross amount (the check) divide it by the number of years the deal is, divide by 12.  That is your untaxed gross monthy amount that needs to be taxed.  Multiply by .4 and that is the net witholding amount from each pay check.


Ex if you are on an 8 year deal and you received 500,000 upfront it would be 500,000/8=6250/12=5208.33x.40=2083.33
 
 
Nov 19, 2008 5:53 pm
duster10:

Correct, check is tax free originally, at Wachovia they put the money into a brokerage acct, from there, you do what you want.  The money is "forgiven" monthly, with modest interest on each amount.

 
For example, a 12K bonus forgivable over one year = 12/12=1K per month on your paycheck in extra taxes (plus interest). 
 
In my opinion, the monthly tax hit sucks, but is typically managable, so find something secure, but it does not have to be zeros, seeing as how yields are so low.  Make sure you have enough liquid to pay month to month bills, and then use CD's to handle the rest.  You can get a one year CD at 4% right now, while a 1 year zero gets you squadoosh.  That is how I handled mine, but to each his own.
 
Why would you use CDs?
Nov 19, 2008 5:56 pm
Dovey:

I've probably narrowed down between Wachovia & Morgan.  The upfront is 125% & 100%.  Back end kicks in after month 14 (or sooner if i hit the number of assets tfrd sooner) = also forgivable loans.

Question:  How do they handle the withholding on those front checks?  I would presume that it would be little to nothing, until it is forgiven each year.  If so, i guess  it would make sense to buy zeros to coincide w/each years liability?  Thoughts or experience anyone??  Thx.

 
I think at MS they forgive it annully and they play the "write me a check for X, and MS will write you a check for X- taxes" game.
Nov 19, 2008 10:07 pm

Most are annual on the forgivness. Also the way the IRS wants to see it now is through a Transition Bonus payment. For example if you got a 900k check on a 9 year deal the firm would pay you 100K on your first anniversary plus the intrest rate (4% for example) charged. They would immediatley take that payment back from you to pay 1/9 of the loan off.



You pay tax on the 100k plus intrest the firm bonused you on. Although most firms are now annual on loan forgivness If you left and payed back a pro-rated amount they would proably stop pursuing you.

Nov 22, 2008 7:15 pm

(retracted post. Wouldn't let me delete.)

Nov 22, 2008 7:17 pm
greyhairedbrker:
duster10:

Correct, check is tax free originally, at Wachovia they put the money into a brokerage acct, from there, you do what you want. The money is "forgiven" monthly, with modest interest on each amount.



For example, a 12K bonus forgivable over one year = 12/12=1K per month on your paycheck in extra taxes (plus interest).



In my opinion, the monthly tax hit sucks, but is typically managable, so find something secure, but it does not have to be zeros, seeing as how yields are so low. Make sure you have enough liquid to pay month to month bills, and then use CD's to handle the rest. You can get a one year CD at 4% right now, while a 1 year zero gets you squadoosh. That is how I handled mine, but to each his own.


Why would you use CDs?





Why wouldn't I use CD's??

Nov 22, 2008 7:59 pm

Duster,
I can't speak for GreyHaired's question on why he questions CDs. But in your case is the tax due annually? So you just staggered a CD per April?

Nov 22, 2008 9:44 pm
duster10:
greyhairedbrker:
duster10:

Correct, check is tax free originally, at Wachovia they put the money into a brokerage acct, from there, you do what you want.  The money is "forgiven" monthly, with modest interest on each amount.

 

For example, a 12K bonus forgivable over one year = 12/12=1K per month on your paycheck in extra taxes (plus interest). 

 

In my opinion, the monthly tax hit sucks, but is typically managable, so find something secure, but it does not have to be zeros, seeing as how yields are so low.  Make sure you have enough liquid to pay month to month bills, and then use CD's to handle the rest.  You can get a one year CD at 4% right now, while a 1 year zero gets you squadoosh.  That is how I handled mine, but to each his own.
 

Why would you use CDs?



Why wouldn't I use CD's??

 
I guess the question is, is there a special reason you're using a CD? Is it due to concerns about the performance of a traditional balanced portfolio at this point, or are you keeping a short term focus because of some element of the loan itself?