Executive Summary
This white paper explores tax-efficient strategies for retirees—particularly those aged 73 and older—using a combination of Home Equity Conversion Mortgages (HECMs) and retirement account management. By strategically managing Required Minimum Distributions (RMDs), leveraging Roth conversions, and using HECM proceeds as a flexible, tax-free* source of funds, retirees can maintain income levels below taxable thresholds while preserving portfolio longevity.
1. Background: The 2025 Tax Landscape for Retirees
The 2025 tax legislation, known as the One Big Beautiful Bill (OBBB), enhanced deductions for retirees and introduced the Senior Bonus Deduction. When combined with careful RMD management and HECM utilization, these provisions create an opportunity to achieve “tax-free* income zones” in retirement.
2025 Standard Deduction (Approximate): – Single (65+): $23,750 – Married Filing Jointly (both 65+): $46,700
With an RMD factor of 26.5 at age 73, retirees can hold approximately $630,000 (single) or $1.24 million (joint) in IRAs before RMDs exceed the standard deduction.
2. The Role of a HECM in Tax-Efficient Retirement Planning
A Home Equity Conversion Mortgage (HECM) can act as a powerful financial buffer, offering tax-free* proceeds that can substitute for taxable withdrawals, pay taxes due on Roth conversions, or provide liquidity for major expenses.
There are five primary ways a HECM can improve tax efficiency during retirement:
1. Roth Conversions
Objective: Move funds from tax-deferred accounts into a Roth IRA without draining investments or increasing tax burdens.
Strategies: – Pay off an existing mortgage with HECM proceeds. The elimination of monthly mortgage payments** frees monthly cash flow to cover taxes on Roth conversions. – Establish a HECM Line of
Credit (HECM RELOC) and draw funds as needed to pay conversion taxes, preserving investment portfolio integrity.
This allows retirees to perform strategic partial Roth conversions while minimizing the impact on liquid assets.
2. Tax-Free* Tenure Payments (The “Power of Zero” Strategy)
Objective: Create a sustainable, tax-free* income stream that keeps taxable income below the standard deduction.
Approach: – Withdraw from qualified accounts only to the extent that RMDs stay under the deduction threshold. – Supplement income with Roth IRA withdrawals (tax-free*) and HECM Tenure payments (also tax-free*).
Formula: [ RMDs + Roth + Tenure = Tax-Free* Income ]
This integrated approach allows retirees to maintain income levels without triggering federal income tax liability.
3. Managing Large Withdrawals
Objective: Avoid taxable spikes caused by large, one-time withdrawals from IRAs or other qualified accounts.
Strategy: – Establish a HECM RELOC early in retirement. The available credit grows over time. – When large expenses arise—such as home repairs, healthcare costs, or gifting—draw funds from the HECM RELOC instead of taxable accounts.
This preserves the tax efficiency of your overall plan while maintaining liquidity.
4. Capital Gains Optimization
Objective: Reduce capital gains exposure and maximize basis step-up benefits for heirs.
Key Tactics: – Use the HECM to stay in the home longer rather than selling while both spouses are alive, preserving full property step-up at death. – Community Property States: 100% step-up in basis at the first spouse’s death. – Non-Community Property States: 50% step-up for the surviving spouse; if the home is sold within two years, up to $500,000 of capital gains can be excluded; after two years, the exclusion drops to $250,000.
5. Deduction Harvesting with Lifestyle Home Loans (LHL)
Objective: Maximize tax deductions associated with reverse mortgage structures.
Strategies: – When purchasing a home using an LHL, paying Mortgage Insurance Premiums (MIP) with cash at closing may be tax-deductible.* – Any payments made back to the LHL, including interest and MIP, may be deductible if the borrower itemizes. – Retirees can plan paybacks strategically in years they itemize to capture the maximum possible tax benefit.
(Subject to IRS rules and income phase-outs. *Consult a tax professional.)
6. Conclusion
HECMs are often misunderstood as tools of last resort, but when integrated into a comprehensive retirement income plan, they serve as tax-efficient liquidity sources. When coordinated with Roth conversions, standard deduction management, and capital gains strategies, a HECM can extend retirement sustainability while minimizing lifetime tax liability.
Disclaimer: This material is for educational purposes only. Tax situations vary by individual, and retirees should consult a qualified financial planner, tax advisor, or attorney before implementing these strategies.
*Please consult a tax advisor. **Borrower must occupy home as primary residence and remain current on property taxes, homeowner’s insurance, the costs of home maintenance, and any HOA fees. Bob Tranchell, NMLS ID 286716. Mutual of Omaha Mortgage, Inc. dba Mutual of Omaha Reverse Mortgage, NMLS ID 1025894. 3131 Camino Del Rio N 1100, San Diego, CA 92108. Connecticut Mortgage Lender License ML-102589. Florida Mortgage Lender Servicer License MLD1827. Maine Supervised Lender License 1025894. Massachusetts Mortgage Broker and Lender License MC1025894. Licensed by the New Hampshire Banking Department, Mortgage Banker License 1025894MB. Licensed by the New Jersey Banking and Insurance Department. New Jersey Residential Mortgage Lender License 1025894. Pennsylvania Mortgage Lender License 72932. Rhode Island Lender License 20163229LL. Rhode Island Loan Broker License 20163230LB. Virginia Mortgage Broker and Lender License, NMLS ID #1025894 (www.nmlsconsumeraccess.org). These materials are not from HUD or FHA and the document was not approved by HUD, FHA or any Government Agency. Subject to credit approval. For licensing information, go to: www.nmlsconsumeraccess.org Equal Housing Lender