To print article, click Print on your browser's File menu. Go back   Search for foreclosure properties What's your home worth? Research any REIT Find top-performing mutual funds Sortable database of SEC filings Personal finance bookshelf Do your taxes online Find It! Article Index Fast Answers Tools Index Site Map Recent articles by Scott Burns: • Why young families are always broke, 8/26/2005 • The overlooked $2.3 trillion deficit, 6/10/2005 • Your ZIP code matters more than your 401(k), 5/13/2005 More...		Decision Center Dont bet home equity chasing a higher return Popular book Missed Fortune 101 has some intriguing ideas about managing assets and tax consequences. But beware: There are four major faults in its assumptions.  By Scott Burns It's a tough story. Newlyweds in their early 20s buy their first home with no money down. They sell it nine months later to build a new one, also with no money down. Two years later they sell and build yet another -- all with no money down. Four years go by, and the house has doubled in value. The young couple has a magical $150,000 in equity. Then, the economy softens. Home sales slow just as the couple's income disappears. They sell what they can to make the mortgage payments. Then they put the house up for sale. But it doesn't sell. Start investing with $100. Explore our new ETF center. Nine months later, the house is sold at foreclosure to the mortgage lender. The couple's equity has disappeared. Their credit is shot. The $30,000 loss the lender eventually took selling the house appears on the couple's credit report for the next seven years. Move equity from homes? That experience, discussed in his book Missed Fortune 101" made a deep mark on Douglas R. Andrew. If he had his way, none of us would have any equity in our homes. We'd borrow every possible dime from our homes, preferably with interest-only mortgages. We'd invest the money in safe, accessible assets. Related news and commentary on MSN Money • A good time for foreclosures if youre brave • Search for foreclosure properties in your area • 3 simple steps to reel in buyers • How to cash in on a fixer-upper • Avoid buying a bad house We wouldn't keep any money in 401(k) or traditional IRA accounts, either. And if we had money in those accounts, we'd figure out how to drain them without any tax consequences. Indeed, Andrew will show us exactly how to do this through seminars advertised in major newspapers. Readers have sent me the ads: "Withdraw up to $60,000 annually from your IRA or 401(k) with no tax consequence." Ads like this get your attention if you've got a bunch of money in tax-deferred plans, own your house outright, and have virtually no debt. Your life is a "taxable event" waiting to happen. Andrews system Andrew seems to offer the answer. Here it is, in a nutshell: Liberate your trapped home equity by selling your home. Buy a new one with a large mortgage. Invest the liberated equity in a life insurance policy that is fully funded as quickly as possible. Let the interest deductions on your new mortgage offset withdrawals from your qualified plans. Finally, borrow the annual yield on your life insurance cash value, tax-free. The book, which ranked 391 on the Amazon sales list when I checked, is one of the most interesting books on insurance I've read in years. I would love it if everyone could convert their taxable retirement savings into tax-free savings. After all, I'm the guy who has been harping on the taxation of Social Security benefits and the inevitable rise of future tax rates. Unfortunately, those who attend the advertised seminars are likely to be very disappointed if they act on Andrew's suggestions. Why? There is a gigantic gap between his smooth projections and what real people are likely to experience. Call it "the devil is in the details" factor. The gap is so large, many could go from having highly taxable retirement assets to having no assets at all. Examine the arguments The arguments in "Missed Fortune 101" have four major faults: Sometimes ignoring the time value of money. When someone tells me, as Andrew does on page 43, that I will pay out more in taxes when I retire than I ever deferred using qualified plans while working, I worry. You can't compare dollars of taxes saved in 1970 with dollars of taxes paid in 2010. It's bad financial reasoning. Overstating tax benefits. Every illustration in the book is based on a 33-percent state and federal tax rate. In fact, few face such tax rates. Certainly, the Prudents, the $70,000-a-year couple on page 161, don't face a 33-percent tax rate. They face a 15-percent federal tax rate plus a possible state income tax. The difference has consequences. If you pay $6,000 in deductible mortgage interest, its net cost is only $4,000 after 33-percent tax benefits. But the net cost is $4,500 at 25 percent and $5,100 at 15 percent. Big difference. The smaller the tax rate, the smaller the benefit of moving your investment to a tax-free investment. Unlikely returns on policy cash values. Given the choice, many people would choose to have a large mortgage and money to invest rather than a smaller mortgage and no money to invest. They make that choice because they believe it is easy to earn more than the mortgage rate. In fact, with mortgage rates approaching 6 percent, it is difficult to find yields over 4 percent. Very few insurance companies are crediting more than 6 percent to policy cash values. Zero consideration of the downside. When we take out a mortgage, we sign a contract to pay interest for up to 30 years, at whatever the rate. When we invest in an insurance contract, the insurance company guarantees a return of only 2 percent or 3 percent. The policy illustration may show a higher rate, but the guaranteed rate is 2 percent or 3 percent. As a result, your ultimate tax-free income may be far less than expected. Indeed, it may be zero. This possibility is not mentioned in the book. More Resources ·  E-mail us your comments on this article ·  Post on the Your Money message board ·  Get a daily dose of market news Search MSN Money     tips   advertisement Sponsored Links
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