Submitted by Anonymous on Fri, 03/02/2007 - 12:40.
There's a mental component of having a PDF file or seeing something written that makes it more authoritative or contain more truth. First off, the simplistic example isn't possible. The 4% mortgages were a very short term, history-making event. You have to be in a huge tax bracket with a huge mortgage (like $210,000) for the mortgage deduction to make any real impact.
Even if you did do it anyway, the 7.2% earnings over 30 years are noted as after expenses. Any decent mutual fund investment in a Roth IRA should earn 9.8% per year after expenses (which are smaller than almost every cash life policy), and has done so for the last century.
If anywhere in that 30 year period you needed your money out of the life policy, you would have to take a loan and loose anywhere from 5-8% in interest the life policy would charge, whereas IRAs have plenty of reasonable excuses for penalty-free withdraws.
I think the PDF is further discredited by its explanation of how banks work. First off, they do not borrow money from the Federal Reserve so much as they "borrow" from depositors' checking, savings, and money market accounts. A big bank like Bank of America pays nothing no interest to depositors in checking accounts and next to nothing in savings, so its fees are the expenses of branch and corporate office overhead.
Depositing funds in the local private bank or credit union have rarely paid 7% since they have to have reasonable loan rates to attract loans for mortgages, home equity loans, personal and auto loans, etc. Money funds have paid on average 6.5% historically (based on Vanguard Prime Money Market Fund history), so making that claim of 7% on a FDIC or CUNA insured account (which insurance is an additional expense to the bank anyway) is a stretch.
This whole discussion of earning 7% interest in a cash policy and taking a loan from yourself is cancelled out by the interest you have to pay the insurance company for taking a loan from the policy through the state-mandated loan provision.
From the PDF:
They have tax deferred growth just like the 401k however, they can withdraw and/or borrow out their money TAX FREE prior to and during retirement.
A traditional IRA contribution would be tax deferred as well as a tax deduction for the contribution's tax year. While it's tax free to withdraw from the policy, the insurance company charges it as a loan with interest penalties, where qualified withdraws from an IRA have no penalty or interest fee back to the IRA company.
They have access to their money prior to age 59 1/2 for emergencies, college cost etc., without any early withdrawal penalties or income tax liabilities.
Same with Roth IRAs, but with fewer fees and expenses.
In the last "simplistic example," the ARM example was a history-making percent and shouldn't be considered by anyone to be a reasonable expectation of monthly payment amounts since ARM interest almost always crawls up above fixed rates after they unlock. Saying home equity doesn't count in net worth is silly and that dramatic bolded zero is over the top for drama in the example results after 9 years of savings.
Then talk about how a 9.8 percent gain is better then 7.2 percent. I know that it shows the s&p 500 but those are account values if you had gone through 2001 like most people did. I'm guessing that your mutual funds lost money, well annuities didn't, EIUL's didn't. That is how they are better plain and simple.
Mortgage interest deduction makes a difference no matter what your income is. I would like to know where you are getting this figure of $210,000
Are you always going to count on a reasonable excuse for reasonable withdrawals, like becoming disabled? And what is wrong with not earning interest on money that you took out and spent. Do you think you should still be earning interest on something you spent? Come on be realistic. Penalty free withdrawals on your $4k per year if your in a Roth.
When they talk about banks borrowing from the federal reserve that is when the bank is first set up. This statement is true and they do borrow from the federal reserve before they have the clients to take interest off of. And don't get me started on BoA, and their cards for illegals.
So what if the interest for the money you cashed out is canceled out. You Took it out why should it earn, unless you would rather be paying a bank that money instead of yourself. Which it seems you like doing.
College cost, emergencies, health problems all reasons to get money out of your ira, how about unemployment, how about a relative dies and its not you affected directly but you need to fly there. Oh I'm sorry Mr. Jones you want to see your grandma here let me take 10% of that for you.
Early withdrawal penalties are not always an occurrence if you read up on policies you can actually access a large portion of your money without a penalty.
Your statement about ARM loans unlocking is not a problem if you refinance. So why not save some money on your monthly payments while you can and then refinance a few years later and capture some more equity.
But maybe your right, I guess it makes sense to have a large sum of money sitting in your house earning nothing. Its just safer that way. While we are at it how about we just put some cash in the can in the back yard, its much safer there and the way that it use to be done.
There are better options out there, they may not be the traditional way but traditions change, nobody keeps money in a can and soon nobody will have equity in their home. They will have it growing, somewhere safe.
Submitted by Anonymous on Wed, 03/07/2007 - 13:31.
Great example of the extremes again. The first terrorist attack on US soil since Pearl Harbor is in the middle of the chart. People who need the money in a shorter time period like the 5 year time period you're showing a loss shouldn't be invested in the aggressiveness of S&P 500 anyway. I'm guessing what your example attempts to show is disaster-resistant investment growth. In that case, you should be comparing the annuity to VGSIX or VGHCX, which not only didn't fall during the time period, but clobbered your annuity example.
Note, annuities often aren't FDIC insured and that time the money in your example was at a level amount, the underwriters still had the money invested somewhere and lost big. Would you rather take the risk of your insurance company holding the annuity going bankrupt and loosing your annuity or having a dip in your mutual fund investment that will recover because it's not underwritten with a contractual agreement.
As for mortgage interest, if you earned $100,000, and paid 10k in mortgage interest, if you only take the interest deduction, it reduces your income to 90K. So you pay taxes on 90k instead of 100k. The marginal rate is 28% at that income level, so you save $2,800 on taxes. That's right, you paid 10K to the mortgage company to save $2,800 in taxes. You are out of pocket $7,200.
If on the other hand you had paid off your house, you lose the itemized interest deduction. Here's the funny part I left out before - married couples get $10,300 as a standard deduction that would cancel out the 10k mortgage interest deduction anyway, and you don't pay the $2,800 in taxes anyway! You pay taxes on $89,700, and you did NOT pay the mortgage company the $10,000, so you have that extra $7,200 in your pocket.
Now why might your accountant say that you should have a big a mortgage as possible, like $210,000 with yearly interest of $13,650? That's more than the standard deduction so you can actually take the $13,650 - 10,300 = $3,350 as an additional deduction over the standard deduction. Just don't forget you dumped $13,650 in a black hole that could have gone in an ultimately conservative money market account earning 5% a year instead of loosing 6.25% a year on mortgage interest.
What if you only owe $50,000 on your mortgage. The interest on $50,000 is only $3250 (depending on the rate) and is not enough to make itemizing worth while; the standard deduction is greater than itemizing the interest. That means that you pay the bank interest, but get no mortgage interest deduction. In this case you are clearly better off to have the mortgage paid off.
Now you're implying you could take the mortgage money and earn 7.8% in an annuity, but you're not considering risk. There is a 100% chance the mortgage company will want their loan principle back, while insurance companies are rated by AM Best and others for financial strength because they have potential to go under. The stronger a the insurance company is, the more conservative they'll have to be with their annuity returns - the natural pendulum of risk. If your mortgage is paid of, your only remaining risk can be covered with homeowners insurance, which you have to have with a mortgage anyway. In all the purchases you make in life to balance risk, shouldn't the place you live have the least amount? Can you name anything I might be missing?
Refinancing is not free; you can't just call up the mortgage guys and say, "Ok, my ARM rate is high enough. Stop it there." You may save some money in the short-term at the front-end, but then you loose all those savings when you pay the lock, survey, inspection, title insurance, escrow changes, appraisal, junk fees for "processing", county filing fees, commission if you use a mortgage broker, and so on, not to mention the extra ding to your credit score for another credit check.
Arguing over withdraw penalties for emergencies from an IRA is pointless because emergency money shouldn't be in a mutual fund, annuity, escrow account, house equity, rare metals, whole life insurance, 401k, 403b, boat, or car. Keep a wad of $20s in a fire safe, bolted to the concrete foundation in your home, then the rest of 3-6 months of income in a savings account, CD, money market account, or money fund, where it is ultimately liquid and easily accessible on short notice. Maybe a little extra could be in a healthcare savings account, if you can find one that doesn't rape you for fees and puny interest at your local credit union. The IRA is for retirement, not for emergencies, and you should only be withdrawing from it for retirement; it is after all called the Individual Retirement Account.
There's a mental component of having a PDF file or seeing something written that makes it more authoritative or contain more truth. First off, the simplistic example isn't possible. The 4% mortgages were a very short term, history-making event. You have to be in a huge tax bracket with a huge mortgage (like $210,000) for the mortgage deduction to make any real impact.
Even if you did do it anyway, the 7.2% earnings over 30 years are noted as after expenses. Any decent mutual fund investment in a Roth IRA should earn 9.8% per year after expenses (which are smaller than almost every cash life policy), and has done so for the last century.
If anywhere in that 30 year period you needed your money out of the life policy, you would have to take a loan and loose anywhere from 5-8% in interest the life policy would charge, whereas IRAs have plenty of reasonable excuses for penalty-free withdraws.
I think the PDF is further discredited by its explanation of how banks work. First off, they do not borrow money from the Federal Reserve so much as they "borrow" from depositors' checking, savings, and money market accounts. A big bank like Bank of America pays nothing no interest to depositors in checking accounts and next to nothing in savings, so its fees are the expenses of branch and corporate office overhead.
Depositing funds in the local private bank or credit union have rarely paid 7% since they have to have reasonable loan rates to attract loans for mortgages, home equity loans, personal and auto loans, etc. Money funds have paid on average 6.5% historically (based on Vanguard Prime Money Market Fund history), so making that claim of 7% on a FDIC or CUNA insured account (which insurance is an additional expense to the bank anyway) is a stretch.
This whole discussion of earning 7% interest in a cash policy and taking a loan from yourself is cancelled out by the interest you have to pay the insurance company for taking a loan from the policy through the state-mandated loan provision.
From the PDF:
A traditional IRA contribution would be tax deferred as well as a tax deduction for the contribution's tax year. While it's tax free to withdraw from the policy, the insurance company charges it as a loan with interest penalties, where qualified withdraws from an IRA have no penalty or interest fee back to the IRA company.
Same with Roth IRAs, but with fewer fees and expenses.
In the last "simplistic example," the ARM example was a history-making percent and shouldn't be considered by anyone to be a reasonable expectation of monthly payment amounts since ARM interest almost always crawls up above fixed rates after they unlock. Saying home equity doesn't count in net worth is silly and that dramatic bolded zero is over the top for drama in the example results after 9 years of savings.
Look at this graph.
http://www.ohioinsureplan.com/images/equity_indexed_graph3.jpg
Then talk about how a 9.8 percent gain is better then 7.2 percent. I know that it shows the s&p 500 but those are account values if you had gone through 2001 like most people did. I'm guessing that your mutual funds lost money, well annuities didn't, EIUL's didn't. That is how they are better plain and simple.
Mortgage interest deduction makes a difference no matter what your income is. I would like to know where you are getting this figure of $210,000
Are you always going to count on a reasonable excuse for reasonable withdrawals, like becoming disabled? And what is wrong with not earning interest on money that you took out and spent. Do you think you should still be earning interest on something you spent? Come on be realistic. Penalty free withdrawals on your $4k per year if your in a Roth.
When they talk about banks borrowing from the federal reserve that is when the bank is first set up. This statement is true and they do borrow from the federal reserve before they have the clients to take interest off of. And don't get me started on BoA, and their cards for illegals.
So what if the interest for the money you cashed out is canceled out. You Took it out why should it earn, unless you would rather be paying a bank that money instead of yourself. Which it seems you like doing.
College cost, emergencies, health problems all reasons to get money out of your ira, how about unemployment, how about a relative dies and its not you affected directly but you need to fly there. Oh I'm sorry Mr. Jones you want to see your grandma here let me take 10% of that for you.
Early withdrawal penalties are not always an occurrence if you read up on policies you can actually access a large portion of your money without a penalty.
Your statement about ARM loans unlocking is not a problem if you refinance. So why not save some money on your monthly payments while you can and then refinance a few years later and capture some more equity.
But maybe your right, I guess it makes sense to have a large sum of money sitting in your house earning nothing. Its just safer that way. While we are at it how about we just put some cash in the can in the back yard, its much safer there and the way that it use to be done.
There are better options out there, they may not be the traditional way but traditions change, nobody keeps money in a can and soon nobody will have equity in their home. They will have it growing, somewhere safe.
Great example of the extremes again. The first terrorist attack on US soil since Pearl Harbor is in the middle of the chart. People who need the money in a shorter time period like the 5 year time period you're showing a loss shouldn't be invested in the aggressiveness of S&P 500 anyway. I'm guessing what your example attempts to show is disaster-resistant investment growth. In that case, you should be comparing the annuity to VGSIX or VGHCX, which not only didn't fall during the time period, but clobbered your annuity example.
Note, annuities often aren't FDIC insured and that time the money in your example was at a level amount, the underwriters still had the money invested somewhere and lost big. Would you rather take the risk of your insurance company holding the annuity going bankrupt and loosing your annuity or having a dip in your mutual fund investment that will recover because it's not underwritten with a contractual agreement.
As for mortgage interest, if you earned $100,000, and paid 10k in mortgage interest, if you only take the interest deduction, it reduces your income to 90K. So you pay taxes on 90k instead of 100k. The marginal rate is 28% at that income level, so you save $2,800 on taxes. That's right, you paid 10K to the mortgage company to save $2,800 in taxes. You are out of pocket $7,200.
If on the other hand you had paid off your house, you lose the itemized interest deduction. Here's the funny part I left out before - married couples get $10,300 as a standard deduction that would cancel out the 10k mortgage interest deduction anyway, and you don't pay the $2,800 in taxes anyway! You pay taxes on $89,700, and you did NOT pay the mortgage company the $10,000, so you have that extra $7,200 in your pocket.
Now why might your accountant say that you should have a big a mortgage as possible, like $210,000 with yearly interest of $13,650? That's more than the standard deduction so you can actually take the $13,650 - 10,300 = $3,350 as an additional deduction over the standard deduction. Just don't forget you dumped $13,650 in a black hole that could have gone in an ultimately conservative money market account earning 5% a year instead of loosing 6.25% a year on mortgage interest.
What if you only owe $50,000 on your mortgage. The interest on $50,000 is only $3250 (depending on the rate) and is not enough to make itemizing worth while; the standard deduction is greater than itemizing the interest. That means that you pay the bank interest, but get no mortgage interest deduction. In this case you are clearly better off to have the mortgage paid off.
Now you're implying you could take the mortgage money and earn 7.8% in an annuity, but you're not considering risk. There is a 100% chance the mortgage company will want their loan principle back, while insurance companies are rated by AM Best and others for financial strength because they have potential to go under. The stronger a the insurance company is, the more conservative they'll have to be with their annuity returns - the natural pendulum of risk. If your mortgage is paid of, your only remaining risk can be covered with homeowners insurance, which you have to have with a mortgage anyway. In all the purchases you make in life to balance risk, shouldn't the place you live have the least amount? Can you name anything I might be missing?
Refinancing is not free; you can't just call up the mortgage guys and say, "Ok, my ARM rate is high enough. Stop it there." You may save some money in the short-term at the front-end, but then you loose all those savings when you pay the lock, survey, inspection, title insurance, escrow changes, appraisal, junk fees for "processing", county filing fees, commission if you use a mortgage broker, and so on, not to mention the extra ding to your credit score for another credit check.
Arguing over withdraw penalties for emergencies from an IRA is pointless because emergency money shouldn't be in a mutual fund, annuity, escrow account, house equity, rare metals, whole life insurance, 401k, 403b, boat, or car. Keep a wad of $20s in a fire safe, bolted to the concrete foundation in your home, then the rest of 3-6 months of income in a savings account, CD, money market account, or money fund, where it is ultimately liquid and easily accessible on short notice. Maybe a little extra could be in a healthcare savings account, if you can find one that doesn't rape you for fees and puny interest at your local credit union. The IRA is for retirement, not for emergencies, and you should only be withdrawing from it for retirement; it is after all called the Individual Retirement Account.
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