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Saturday, 07.31.2010 |
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| Missed Fortune 101 |
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Product Details
Notes
the author is Douglas R. Andrew
this book was published in 2005
he went to Chicago to attend The Strategic Coach, by Dan Sullivan
the course was taught by Lee Brower
Lee's company is Empowered Wealth, LLC
non-spousal heirs often get only 28% of their parents' IRAs and 401(k)s
if you accumulate a large nest egg, you'll still be in a high tax bracket
so even when you retire, you won't be taxed in a lower bracket
the key proposal in this book is to manage home equity differently
don't pay off your mortgage early by making accelerated payments
choice and control over financial assets is important
you can control taxes by redirecting to charity
or you can make business investments that help the economy
these choices then reduce your tax liability and give you more control
traditional estate planning often hurts the heirs
it encourages extraordinary consumption and discourages savings
you need to actively build a system for transferring wealth properly
only 3% of family enterprises survive beyond the 4th generation
Robert Frost said, "Every affluent father wishes he knew
how to give his sons the hardships that made him rich."
loan your heirs money or enter into joint ventures
but the loans have to be paid back to the "family bank"
all family members must share knowledge and experience with each other
the family should gather regularly to reaffirm its virtues and intentions
why do you get tax breaks?
because you are doing things that place less burden on the government
if you own a house, you get a tax deduction
because it's better for the economy if you own rather than rent
same thing with an IRA, if you invest, you need less from government funds
if you take care of your kids, you get an exemption on your tax return
because it's less likely that you'll need human services from the state
so in general, the more choice and control you exercise, the less tax you pay
remember that tax laws are constantly changing
it's not that bad to move up to a higher tax bracket
you pay the higher rate only on the dollars earned in excess of the threshold
so it's not like the rate goes up on your entire income
only the part of your income that's above the threshold
the author's suggestion is to do an interest-only mortgage loan
and pay little to no cash down payment
this is obviously dangerous given the recent housing crisis
since this book was published in 2005, it may be outdated now
retirees are often in the same tax bracket or higher
that's because they have fewer deductions and exemptions
tax deferred retirement accounts can cost you more later when you withdraw
for employer matching benefits, don't contribute more than the match
set aside a minimum of 10% of your income annually
for a higher standard of living, set aside 15-20%
one of the main points is the deferred taxes may mean increased total tax
option 1 is to invest after-tax dollars into a taxable account
this is the worst option, because you pay the most in taxes
option 2 is to invest after-tax dollars into a tax-deferred account
this is different from a retirement account
it's more like non-leveraged real estate
or mutual funds that pay no dividends but grow through capital gains
you pay the long term capital gains tax when you sell the asset
and you pay regular income tax on the money you withdraw
option 3 is to invest after-tax dollars into a tax-free account
this includes Roth IRAs
you pay tax upfront before investing, but you withdraw tax free
option 4 is to invest pre-tax dollars into a taxable account
this includes traditional IRAs, 401(k)s, and other qualified plans
you can invest the full amount upfront
but you pay regular income tax when you withdraw
the yearly amount actually is the same as option 3, the Roth IRA
option 5 is to invest pre-tax dollars into a tax-free account
this requires special equity management
here's the key proposal of the book:
you borrow on your home equity
then you invest that entire amount in a retirement plan all at once
typically you use an investment-grade life insurance contract
so that large amount grows to a much bigger amount over time
you have to pay interest on your home equity loan
but that interest is tax deductible
and since it's home equity, it grows tax free
when you withdraw, it's also tax free
because it's not earned income, passive or portfolio income
the only drawback is that you have a mortgage while you're retired
but that means you still get to take a mortgage deduction
many people save in an IRA to afford to buy a cabin or condo
buy that real estate now when it's cheaper and carry a mortgage
the author suggest doing an interest-only mortgage loan
that may not be so easy anymore with the sub-prime mess
the idea is that the mortgage payments are deductible, just like IRA deposits
one key to his idea is that the real estate must appreciate over time
then you compare the appreciation to the stock market
real estate benefits from leverage due to the bank mortgage
so the value of your house may grow to the same amount as an IRA
assuming that you pay the same amount each month to either one
the advantage is that you get to use that cabin or condo all those years
one key thing is that even if your stocks grow to the same amount
you still have to pay tax on the gains when you withdraw
so essentially you can consider the real estate gain "tax free"
since it has increased your net worth and you don't have to sell it
or if you sell, you can roll over your real estate gains
if you have low income one year, you may drop to a lower tax bracket
that's a good time to convert some retirement funds and pay the tax
as long as you only sell enough to still be in the lower bracket
the idea is to pay the IRS now instead of paying much more later
convert qualified retirement funds into a non-qualified tax-free account
surviving heirs may only get 22 cents on the dollar
if you have to pay 45% in estate tax and 33% in income tax
the Taxpayer Relief Act of 1997 may be useful in real estate
you can avoid up to $500,000 of capital gains
this applies on the sale of a principal residence once every 2 years
home equity is not liquid or safe and has no rate of return
mortgage interest is your friend, not your foe
sometimes it's good to pay interest in order to earn more interest
understand the difference between debt and liabilities
banks can be debt-free but have millions of dollars in liabilities
the key is to have assets that are growing faster than the debt payments
your goal is to borrow money at a lower interest rate
and then invest it to earn money at a higher interest rate
some of these ideas are very similar to Kiyosaki's Rich Dad
like the difference between good debt and bad debt
and the three types of income: earned, passive, and portfolio
over 30 years, you end up paying two and a half times the house value
that's why people want to pay their mortgage off faster
you want three elements in any investment:
liquidity, safety, and rate of return
a fourth benefit is any tax advantage
liquid means you can get your money out whenever you want
safe means the money is insured or guaranteed
rate of return is how fast the money grows over time
home equity is not liquid, you can't take out money without selling
even if you make early mortgage payments, the next payment is due
so you get no benefit of paying ahead
and you can't miss payments even if you paid extra before
note that the bank pays you no interest on your down payment
also the amount of appreciation is not affected by the amount of equity
so the value of your house goes up the same amount
whether you've paid a lot of the principal or mostly just interest
so that's why you want to separate money from your home equity
because your house value will go up the same amount over time
but you can also invest the home equity loan to make more than you pay
there will be a mortgage expense
the key is to get the tax deduction and pay less than you make
you are using arbitrage to make money from the home equity loan
it's important to invest the borrowed money into a tax-free account
then you get the tax deduction on the mortgage interest
and you don't pay income tax on your new capital gains
you can't spend the money you take out of your home equity
you have to reinvest it to get a higher rate of return than what you pay
don't use home equity to pay off credit card debt or buy purchases
always keep some assets liquid to handle emergencies
maintain flexibility to ride out market lows and take advantage of highs
home equity is not a place to store cash safely
properties with the most home equity often get foreclosed on first
if you think you might lose your income, secure an equity line of credit
the goal is to have a side account that can cover your home equity
so you're essentially "debt-free" because the sum adds up to positive
you keep your home fully mortgaged even though you have cash to pay it off
make the minimum down payment
if you put more down, your monthly payments will be lower
but that extra down payment money could have been invested instead
and your house will appreciate the same amount either way
a higher monthly payment is good as long as you have the cash flow
because you get a higher tax deduction from those payments
and you can invest the extra down payment money on the side
you could even do negative amortization
where the monthly payment doesn't even cover the interest
so your loan balance increases each month
but you have to be really disciplined with your side fund
you must be investing and earning a return, not spending the money
three possible investments:
annuities
some mutual funds
investment-grade life insurance contracts
for insurance, get the lowest death benefit and pay the highest premium
this lets you invest excess cash beyond the trust cost of insurance
this is universal life insurance, so the monthly premiums will be higher
but you're using it as an investment vehicle
the main advantage of life insurance is that it can be tax free
both the accumulation and the withdrawal may be tax free
it can also transfer to heirs without any income tax
the rate of return is usually lower than mutual funds
so the key is whether the tax advantages are good enough
the IRS realized that overfunded life insurance contracts were investments
TEFRA and DEFRA then required minimum death benefits
to prevent people from using life insurance as a tax free investment
universal life insurance is different
it's not term life insurance because it accumulates cash value
but it's not whole life insurance either
because premium payments can be varied and adjusted
so it's sometimes called flexible-premium life insurance
TAMRA created the Seven-Pay Test
a policy should be maximum funded no faster than 7 years of equal payments
in the early years, the insurance expense will be a higher percentage
later on as you maximize the fund, the percentage will be lower
rather than withdrawing money from your fund, take a tax-free loan
the insurance company has the main balance as the collateral
a loan on an insurance contract is not due in the owner's lifetime
you can leave the loan open until death
when the insured dies, the loan balance is deducted from the death benefit
but the interest you earned on the cash value can increase the death benefit
the basic idea is that you take a loan each year of your interest payment
if you just withdrew that interest, you would have to pay tax on it
your overall balance stays the same in the account
but by taking a loan, you get the money tax free
in most cases, the interest you earn will be less than the loan interest
but usually it's only a spread of 2%, so that's worth it for the tax savings
in some cases, you can even get a zero spread on a preferred loan
don't be house rich and cash poor
keep a large amount of safe, liquid investments that also grow over time
look for ways to save on taxes when you withdraw money for retirement
conserve, don't consume
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