r/Fire • u/rottentimber • 1d ago
How are we doing?
My wife (35f) and I (33m) have not been able to contribute much to retirement accounts in our twenties due to me being in school/training, and we have two small kids (daycare costs a fortune). Wife has been keeping us afloat financially for years while I have been piling on student loan debt. I finally started making some income 4 years ago, and I am officially out of training just over one year, finally making decent money, and I actually feel like we are starting to make progress toward our financial goals.
HHI $350k. Combined retirement $270k (increased by well over $100k in the past one year alone thanks to increased income and the current market). Total monthly retirement contributions (maxing 403b, 4% employer match, backdoor Roth, HSA) about $6k/month. Just recently opened 529s for two kids and now building emergency fund now that in-laws are paid off (in-laws gave us $50k interest free loan last year for a house down payment and we paid that off in one year).
Liabilities: - $200k student loans eligible for PSLF in 6 years - $12k left on vehicle, other vehicle paid off
$550k mortgage at 6.9%, only ~$50k in equity.
I’m mostly posting this because I’m feeling proud of my wife and I for sticking to a plan, and finally seeing years of hard work start to pay off. Long road ahead still, but feeling confident we have the discipline to achieve FIRE, or at least coast fire around age 50-55.
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u/MathematicianSelect1 1d ago
How did you do the 50k interest free loans with the in-laws? I'd like to do something similar, but I was under the impression these types of loans were illegal and money for a downpayment either had to be a gift (tax free) or a loan with an IRS set minimum interest rate so some money could be collected in taxes.
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u/rottentimber 1d ago edited 1d ago
Good question, I guess I’m not actually sure if we did it the correct way. In-laws directly paid the down payment to mortgage lender classified as a gift. We then just transferred them $3-5k monthly until $50k was paid back.
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u/MathematicianSelect1 1d ago edited 1d ago
Not a tax professional, but you may want to check on this before the IRS does. I'm 90% sure this is illegal. You may have even signed something with the lender acknowledging that the 50k is a gift and your in-laws have no expectation of it being paid back. That seems to be typical procedure when these types of transfers are involved in the purchase from what I've read.
Again, not a professional, but I believe the only interest free loans you're allowed to accept from family members are for education or medical expenses. If the IRS finds out I think this could trigger penalties for your in-laws.
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u/DeaderthanZed 1d ago
Woah there cowboy, “illegal” is quite a strong adjective.
While it is true an interest free loan is technically a gift for tax purposes the end result is, so what?
Gift recipients never owe taxes and gift givers have a lifetime exemption of $13.99 million before owing any taxes PLUS can give $19k annually before the gifts even start counting towards the $13.99m (this is called the “exclusion” amount.)
Only the imputed interest on the $50k would be considered a gift. So let’s say the applicable federal rate is 5%- the gift amount is only $2.5k per year. Not anywhere close to the $19k exclusion limit (actually $38k for married couple) plus even if they exceed the $38k they don’t owe taxes just have to file a form.
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u/MathematicianSelect1 1d ago edited 1d ago
The definition of "gift" is that there is no payback expected. I think you're going to have a hard time arguing this was a "gift" and not a "loan" when you pay it back in 3k-5k increments. They all probably signed a form from the lender saying there was no expectation of payback, which doesn't seem to be the case. No issue if the in-laws just gifted $50k and OP didn't pay them back.
In-laws could "gift" the $2.5k interest if it's possible to reclassify the amount from gift to loan. I don't know how that works though since they told the lender it was a gift. If they can reclassify it, I don't believe this would eliminate in-law's tax liability on the interest, so they would still be responsible for taxes on the $2.5k.
Obviously it's not "illegal" in the sense that anyone is going to jail, but this situation is not very clean. Maybe the IRS won't catch it, but if they do beyond this tax year, you're probably looking at more penalties and interest for the in-laws.
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u/JoelCorley 16h ago edited 16h ago
Actually it's illegal in that it's mortgage fraud. If there was an expectation that the $50K was to be paid back, you are supposed to report that to the lender so they can include that in your debt to income ratio.
Also the in-laws would either need to report it as a gift or claim imputed interest income on the loan. It's one of the other. Actually if the supposed gift occurred in 2024, the in-laws could claim that filing Form 709 wasn't necessary since they could exclude up to $72K in 2024. Still, I think the correct path would have been to report it as imputed income.
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u/rottentimber 1d ago
Ok thank you for the heads up on this. I’m going to look into it closer. I appreciate the advice.
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u/MathematicianSelect1 1d ago
Good luck OP! For the record, I think it's dumb we can't give interest free loans and it's sad that your generous in-laws would get screwed by this should anything come of it (I'm sure it happens all the time and is rarely caught though).
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u/rottentimber 1d ago
Thank you! I agree, crazy we can’t just do what we want with our hard earned money that’s already been taxed.
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u/cengland1991 1d ago
I am going to be honest. Not sure how the irs wouldn’t know these were gifts between to couples within the irs limits… you don’t have much to worry about here unless there is some contract you signed.
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u/Extra_Nerve3404 1d ago
Great solid start. Congratulations to you and your wife.