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Financial Planning

If Everything You Knew About Financial Planning Was Wrong,
How Quickly Would You Want To Find Out?

A Guest Article by Saul Simon

The following pertains to the topic/questions of:

  1. Buying/financing a purchase of real estate
  2. Contributing to an IRA, 401(k), UNI (K), SEP, (qualified assets)
  3. Life Insurance

For years I would tell people pay off their mortgage, have a mortgage burning party, just the way we were taught. Defer as much money as possible into a retirement plan, get the maximum tax deduction, buy term insurance and invest the difference. What I'm about to share with you is 180 degrees opposite of everything that we learned and that I just mentioned.

Part I: Mortgages
It is in our own financial interest to pay interest only I/O on a mortgage, take the full income tax deduction, and redirect the extra monies elsewhere to accumulate wealth. A mortgage is a very misunderstood product, (financial tool), and it's one of the largest financial products that will have a dramatic impact on our overall financial plan (both today and 30 years from now). A normal 30 year amortized mortgage is broken down into a payment of principle and a payment of interest (the equity that we have established in our home is earning no interest. Feel free to call or e-mail me should you need further explanation on this subject) by paying additional principle into your mortgage, you’re investing money into an account that earns no interest. The longer I keep this mortgage, the more of the payment goes toward principle, and less towards interest, causing a smaller income tax deduction on your tax return.

Simon says it is in our own financial interest to pay interest only I/O on a mortgage, take the full income tax deduction and redirect the extra money elsewhere to accumulate wealth. One of the few deductions we have available is interest on our primary/secondary residence.

Note: (% on a $1 million, + % on $100,000 on a home equity loan).

Part II: IRAs and Qualified Assets
We were taught to accumulate wealth, maximize the deduction inside a retirement plan & receive an income tax deduction. Ladies and gentleman, the government is brilliant. They're creating a taxable annuity for themselves. I use an analogy of being a farmer. Would you rather pay tax on the seed or what you harvest? The Seed, of course!

You put in $10,000 into a 401(k) plan; you get a $3,000 tax deduction at a 30% tax bracket. It grows for 30 years and this $10,000 contribution hypothetically is $50,000 based on investment performance. At 70 1/2 years old, the government requires us to take the money out based on a life expectancy table. It's fully income taxable and has grown and compounded over a very long period of time. What's worse, when I die and it ultimately passes to my children, it is fully income taxed at a 40%-50% income tax rate. So we contribute as much as we can into a retirement account. Defer, defer, defer. Spend countless and sleepless hours questioning our investment strategy, (if you've created one) feeling insecure, worried, concerned about volatility of your investments & outliving your money.

How many people do you know are 90 years or older? Am I doing the best I can? Am I keeping up with my peers? You get the picture. Trying desperately to get a good solid rate of return based on our risk tolerance, and then ultimately pass this IRA asset to the next generation, creating a massive ordinary income tax for the children.

Note: upon distribution, this IRA asset is added into the children's ordinary income and taxed at their income tax rate. There is no discussion of estate taxes, that’s entirely a separate issue.

Second, there is a stretch/deferral opportunity on the IRA to be discussed later.

Simon says plan and combine this strategy with an interest-only mortgage.

Part III: Life insurance, a misunderstood financial product:
We “question” should I buy term insurance?
A policy needed for a specific timeframe with costs guaranteed for a certain time period, then gets prohibitively expensive and we have no choice but to let it lapse. By the way, 1% of all term insurance policies actually get paid out from an insurance company.

Permanent insurance: These policies come in different variations that build cash value, whole life, universal life, variable life, etc. Money is both tax deferred and compounds. After a period of time, say 15 years, you can withdraw your money on a FIFO basis, (first in, first out) and pay no income tax. The monies are a return of your principal, so we contribute after tax money into a life insurance product, the monies grow tax deferred, compounds, and what's extraordinary, you take your money out income tax free, be it for college funding, supplemental retirement, etc.

By the way, there is no 10% penalty if you take dollars out before age 59 1/2.

Simon says:
The structuring of a life insurance policy is crucial, contribute the most into a life insurance policy, minimizing the death benefit, so you take advantage of the full characteristics, the tax deferred accumulation, of this life insurance umbrella. This product has similar characteristics as a Roth IRA, except there are no income limitations, and there are no maximum funding requirements. Roth Ira’s: to be eligible to contribute, your adjusted gross income (AGI) as a single tax payer must be less than 50k married 150k, Maximum contribution 4k.

When do you know the government to limit something bad? I believe in the Roth IRA, I think it's something that everybody should contribute towards if eligible.

Unfortunately, not many people are eligible to participate.

When you purchase life insurance, you are creating a death benefit so that if you don't have the time to accumulate wealth over a period of years, the policy will replace your income. So if I accumulate 200,000 in a policy & I have a death benefit of 300,000 I'm only paying for 100,000 of insurance because the 200,000 is my money (Decreasing term insurance).

Simon says, By employing these strategies, you will lower your taxable income, help pass wealth onto the family in a more tax-efficient manner, i.e., tax-free.

My suggestion is to tailor these concepts to your specific situation, thereby accomplishing your goals. I welcome the opportunity to explore questions and help tailor a plan that fits your needs.

Saul Simon hosts a TV show, "Simon Says Manage Your Money." He has been in the financial services field for over 20 years and can be reached at or
(888) SimonSays

Best regards,

Saul M. Simon CFP, CFS, RFC
Simon Financial Group
399 Thornall St. 12 Th floor.
Edison, NJ 08837
Phone: 732-623-2070
Fax: 732-623-2088

Securities offered through Lincoln Financial Advisors Corp., a broker dealer. Investment Advisory Services offered through Sagemark Consulting, a division of Lincoln Financial Advisors Corp., a registered investment advisor. Insurance offered through Lincoln affiliates and other fine companies.