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#128 Using a reverse mortgage to pay Roth conversion tax


Now in your 70s, you’ve been giving thought to those looming required minimum distributions from IRA. Despite the recent dismal market performance, your rollover account is still over the seven-figure mark, and your accountant is actually recommending converting it to a Roth, either all at once or in two stages.

Since you still have passive business interests that generate income in addition to a pension, you are not in need of that IRA money to support your own lifestyle.  Your primary residence and a vacation home are both fully paid for, and your two adult children (the named beneficiaries of the account), are not in need of help right now. With no need to generate additional cash, you definitely do not relish the thought of being forced to make taxable RMD draws, much less making more than $160,000 in additional taxes on the conversion.

It might make sense to cover the tax bill using your own housing wealth in the form of a reverse mortgage.  That way, there would be no need to either cash in non-IRA investments nor to dilute the value of the IRA account itself. And, with no monthly principal or interest payments required, there would be no need to compromise your own lifestyle. If, once the Roth conversion is complete, you should choose to make some reverse mortgage payments, those would not only reduce the mortgage balance and minimize interest costs, but increase your available line of credit, which would grow at the same rate as that being charged on the mortgage balance.

By converting your IRA to a Roth, you’ve realized, you can sidestep those “looming” RMDs.the Managing your Roth conversion by deploying a now “dormant” source of funding can make the process a whole lot smoother and less disruptive to your ongoing investment goals.

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. Please consult a tax advisor.