Keeping the tax code in mind will help you refinance “bad” debt with “good” debt. You might, for example, borrow from your broker to make investments and use the money you otherwise would have used for investments to pay down credit card debt. Broker loans (“margin accounts”) typically are reasonably inexpensive–about 7 percent today–and generate deductible interest, as long as you have a similar amount of investment income each year. Thus, margin loans are better than credit card debt.
Even better is housing related debt, including the interest on up to $100,000 worth of home equity debt. Such interest is deductible, no matter how you spend the proceeds, as long as the credit line is secured by a first or second home.
Therefore, debt management doesn’t mean paying off all your debt. Rather, it means avoiding nondeductible personal debt at all costs. Either pay down such debt or replace it with less expensive, deductible debt.
