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In my practice, mortgage planning is quickly cathching on and clients are beginning to get it.  My greatest joy in preparing a comprehensive mortgage plan is when the client truly gets and understands it. 

Here is an example of a most recent plan:

HERP: Home Equity Retirment Planning

This client was paying $500 a month into a qualified retirment plan. Under their plan (as well as many Americans), they were paying $500 a month into a tax advantaged 401(k) in hopes os seeing this money grow to an amount that could sustain them in retirment. 

At a rate of 7.50%, this money would grow to $1,015,381 in 35 years.  Assuming the 7.5% continues, they were to be able to retire and pull out $75,000 roughly per year.  That puts them in the 25% Fed and 8.3% tax bracket in California, so they would pay $25,000 in taxes to withdraw this money.  In other words they would pay Uncle Sam $25,000 in taxes on the $75,000 they would withdraw.

In only 3 short years, this couple will pay back more than 100% of the tax savings they received from Uncle Sam in 35 years of 401(k) investing. 

We in turn advised them to stop contributing to the qualified plan and instead look at a more prudent and tax favorable approach: 

The client owed $80,000 on a home worth $200,000.  Utilizing a conduit in a mortgage we helped them immediately reposition $80,000 into "investment grade life insurance."  I won't go into all the details, but the contracts are based on the S&P 500 and are fixed universal (never variable) life contracts that meet guidelines for Tefra, Defra, and Tamra. 

Their loan was locked at 5.625% x 33.33% = 3.75% on an after tax basis.  The mortgage also mirrors the benefits of the 401(k) it is just filled out in a different location on the tax form.

At 7.5% interest, the client will see this fund grow from $80,000 to $1,005,510 in 35 years due to the cost of the insurance costs be substracted from the investment account. 

However, unlike the 401(k), the funds being withdrawn of $75,413 are 100% tax free because the Financial Planner structured the contract in such a way that although it looks and behaves like an investment, it is treated as an insurance contract and therefore 100% tax free. 

These clients will be able to successfully withdraw $75,413 and keep 100% of it.  The additional $25,000 that otherwise would have been paid to the govt represents a 50% increase over where the client would have been.

More over . . .

• $75,000 in non taxable income is equivalent to $113,120 taxable.
• They could tap into this fund at anytime prior to 59 1/2 unlike their former qualified plan
• They have a untaxed death benefit which can be passed to their heirs.
• They are also not subjected to forced withdrawals at age 70 1/2 unlike the 401(k).

Their after tax cost of the mortgage = $250.01 per month since they utilized a 10 years interest only loan for their product. 

So in other words, the client freed up an additional $250 a month, accomplished their retirement goals in one fell swoop and will experience Tax FREE (as opposed to tax deferred) withdrawals at retirement. 

BTW, with the additional $250, the clients purchased a 529 for each of thir 2 kids at $100 a month and set aside the remaining $50 to go out to dinner one time per month to further plan and review and enjoy a couple night out. 

For more info: mortgageplanner@247refi.com