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Hi Zev. In your post #10029 you questioned my scenario of sheltering taxable IRA income with additional mortgage interest. Sorry for the delay. Work is the curse of the drinking class. Please bear with me through the detail required to respond to your observations.

First, all financial/asset planning decisions are contextual, i.e., they become good or bad decisions relative to "the particularity of objective conditions" they are intended to address. There is no such thing as a good investment or a good investment strategy. There are only good investments/strategies for a particular person in a particular situation with a particular set of goals. That said, let me move on.

In your post you suggest that I have proposed structuring a home equity loan to offset the taxable income from an IRA/401k. You then propose some terms for that loan. First, and not to be picky, but a home equity loan at 10% simple interest is higher than what is currently available. Second, per my tirade above, I would generally recommend a HEL or HELOC in peculiar situations. My weapon of choice would generally be a 30 year fixed rate loan. Hang in there; this IS going someplace.

Consider the following assumptions, which are part of the "particularity of objective conditions".

1. Mandatory withdrawals means age 70.5
2. Life expectancy of at least 15 years.
3. Significant alternative income making IRA $ "extra" ; amount at issue: $5,000 per year(this whole discussions springs from the problem of what to do with unneeded, taxable, mandatory income)
4. 28% mrgainal federal tax bracket, 7.5% state; combined bracket at the margin: 33.4%.
5. House worth at least $100,000 owned free and clear.
6. With property taxes, charitable deductions and long term care insurance premiums, our protagonist is at or near the threshhold to switch from standard to itemized deductions.
7. Estate planning is an issue: (a) pass maximum assets to children/grandchildren; (b) minimize FET.

I encounter this profile regularly.

Possible scenario:

Take IRA income, pay taxes, invest difference ($5,000 minus $1,670 in taxes = $$3,330 to invest).

Invest in some totally tax free vehicle yielding 10% per year. Asset value after 15 years: $116,383.

Second possible scenario:

Take out a 30 year fixed rate mortgage at the current rate of 6.875%. This will yield $75,000. Monthly payment $492.70. First 12 months' interest deduction $5,131.96. Withdraw either the minimum $5,000, or the full $5,131,96. Pay principal out of pocket ($780.44).

Purchase a VUL policy with the $75,000. It will give you an immediate death benefit of $122,442. Do this by establishing a irrevocable life insurance trust with Crummey powers. Gift the $75,000 to the trust as a joint gift from both protagonist and spouse, to children/grandchildren. Not a taxable event.

Assume the policy grows at the same 10% gross rate of return. After policy costs the net growth rate will be somewhere in the 7.6% range.

After 15 years the policy will have a death benefit of app. $225,800.

Estate planning considerations: The entire $225,800 will pass to the children/grandchildren income tax free. It is also not an asset in the estate of our protagonist or the spouse. Also, the value of the house in the estate will be reduced by the mortgage balance of app $55,000. If the estate of the couple even begins to have real FET exposure you are looking at a rate of 24% on this money. That's a tax saving of at least $13,200 on the house alone. If the IRA-withdrawal investments have not been moved out of the estate the tax saving would be about $45,600.

Net result: Additional assets passed to the heirs of
at least $67,600. The figure would be higher (app. $100,000) if the IRA investments are still in the estate.

The lump sum created ($75,000) and compounded over a 15 year time period will grow to a larger future sume than a stream of payments compounding over the same time horizon, even at a higher rate of return. Back to the six functinos of a dollar: FV of 1, and FV of 1/p.

The Crummey trust as an asset passing vehicle, and the life insurance policy as a tax sheltering vehicle, are particular to this scenario. This is not a blanket endoresement of these strategies or vehicles. But in this case it produces positive results, which is the governing factor in whether or not it is an appropriate recommendation.

The operative factor is the time value of money. By leveraging the asset over 30 years, the PV cost of funds is kept at the lowest. The lump sum compounds at a greater rate than the cost of funds. Tax overlays are factored in, and the gain is anticipated.

Hope this sheds some additional light on why I sometimes recommend leveraging the house (capital asset). ...Because it works.

I welcome your insightful response and additional questions.

Be well. dharmadollars
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Thank you for your reply.

As I said in my original post #10029, I chose my numbers for them to come out evenly (I didn't try to come up with a more realistic scenario). Anyway, if I understand what you are saying, you advocate using the IRA/401k income-offsetting technique as an estate-planning tool. It allows you to, both, convert your forced IRA/401k withdrawals into a lump sum and invest that sum in a tax-free vehicle, and to pass the reinvested proceeds outside of your estate, thereby saving on additional taxes.

Are there any situations where this can be done for the current benefit of the 'protagonist', as you refer to him/her?

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The point of my response to Zev's initial, cogent question was that there are numerous situations where using taxable qualified plan distributions in tandem with structuring mortgage debt can produce advantage. The estate planning dimensions of my post are particular to the example, but the viability of the strategy does not turn on the estate planning aspect. I will post again in response to your request for examples of more contemporary advantages. I just didn't want to delay responding as long as I did on the previous post.

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Okay, so our protagonist, Sparky, at 70.5, decides to indulge his/her postponed fantasies. (S)he will purchase a hang glinder, a couple of snowbiles, entry tickets to a slew of bocci ball tournaments, exotic stamps for the stamp collection, art, bass fishing tournaments, etc. Total bill: $75,000. Not to worry; (s)he has the cash.

The assets were previously invested, yielding 10%. But what the heck, life is for living. Over the following 15 years that $75,000 would have grown to about $313,294. But we'll get part of that back. The $5,000 mandatory distriubtion from the QRP is still lurking out there. We'll pay the taxes and invest the rest annually at the 10% rate of return, along with the average annual principle payment of $1,000 on the mortgage in scenario two. After 15 years that sum will have grown to $135,575. So we're only out $177,719. But, again, what the heck, life is for living. And they don't have armored cars in funeral processions.

Or, Sparky could keep the investment portfolio intact, and grow those assets to $313,294. (S)he could take the QRP money to offset the interest on the $75,000 mortgage used to purchase all of those goodies. Sparky will derive the same amount of enjoyment from those goodies. And 15 years later the increased assets of $313,294, minus the mortgage balance of $55,200, leaves a net asset base of $258,094.

In my math that's $122,519 better than the no-mortgage scenario. And the benefits derived are contemporary.

Hope this input moves the conversation forward.

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