Newspaper article The Florida Times Union

Loan Deal Is Too Good to Be True

Newspaper article The Florida Times Union

Loan Deal Is Too Good to Be True

Article excerpt

Readers with questions about estate planning, taxes and investing

were able to find help when a group of volunteers from the

Jacksonville chapter of the Chartered Life Underwriters and

Chartered Financial Consultants spent a recent Saturday morning

at the Times-Union answering their phoned-in queries.

Here is a sampling of questions from the session, along with

answers from the planners (readers' names have been omitted):

Q: My mortgage company recently contacted me about taking out a

home equity loan and using the money to invest in a tax-deferred

annuity. Can I deduct the mortgage interest while my money grows

tax-deferred in the annuity?

A: Sorry, this deal sounds too good to be true, because it is. In

this situation, the Internal Revenue Service would disallow your

mortgage interest deduction since you specifically used the money

to buy a tax-deferred investment. Banks have been subject to a

similar rule for years but, until recently, the IRS has been less

strict on abuses by individuals.

But don't give up yet -- your investment leverage strategy is

sound. You can still borrow the money and take an investment

interest deduction (not to exceed your investment income for the

year) as long as you invest in taxable securities like stocks or

mutual funds.

The good news is the appreciation in the price of your

securities is tax-deferred until you sell. As with any

complicated tax issue, you should always seek the counsel of a

tax professional.

Q: I am a 45-year-old woman who has saved regularly in a

tax-deferred annuity over the past 20 years. Recently, I have

become concerned about the financial stability of my insurance

carrier. Is there any way I can change to a more financially

secure insurance company without paying taxes on the distribution?

A: Yes. Under Section 1035 of the Internal Revenue Code, you are

able to complete a tax-free exchange of your old fixed annuity

policy for a new annuity policy.

This process involves the trustee of your old policy

transferring your funds directly to the trustee of your new

annuity contract. Your new policy can be fixed or variable (i.e.

invested in mutual funds) or a combination of both depending on

your financial goals.

By using the "1035 Exchange" income tax rules, you will avoid

paying thousands of dollars in income taxes when you move your

old annuity money to your new annuity policy. Again, you should

seek the counsel of a tax professional.

Matthew B. Bishop

Ernst & Young LLP

Q: I am expecting a sum of money when my parents' estate clears

probate soon. Do I need a planner to help me to maximize this

money for my retirement? What does a financial planner do? How do

they charge? How do I find one?

A: Financial planners interview you about your situation and your

needs. …

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