In last week’s blog post, we talked with a 69-year old gentleman who had chosen to defer social security benefits to age 70 and who was hoping to continue deferring IRA withdrawals until age 73. While he’d been able to offset some of his “gig” earnings with business expenses, thus mitigating the tax burden, his concern was that should that income decline, forcing him to begin IRA withdrawals early, the “tax haircut” on the combination of social security and IRA withdrawals was going to be dramatic.
We suggested that, with a reverse mortgage on the home he shares with a life partner, he could arrange for non-taxable, to-be-accessed- as-needed – income to supplement the social security income, allowing him to continue deferring withdrawals from IRA over the next four years. In a sense, he’d be using the equity in his home as both a safety net and a tax deferral tool.
In a recent article in Financial Advisor, Ed Slott actually advises people with high income and/or high net work to do the exact opposite. The tax deductions offered by IRAs and 401(k)s are merely loans from the government that will have to be paid back at the worst possible time, he says. Worse yet, he warns, “the payback may come from the accounts’ beneficiaries, who could inherit in their worst earning (and peak tax bracket) years”.
Post the final SECURE regulations, Slott advises, RMD are to be ignored. Think “maximum”, not minimum – How much can be withdrawn now, and in the near future, at relatively modest tax rates? It’s time for un-required distributions. Use the money to buy insurance payable to descendents or to up charitable contributions, and convert traditional IRAs to Roths.
For such high net worth individuals, we add, housing wealth can also be part of a “think now” plan to accumulate wealth that can be passed on to beneficiaries with little or no tax consequences. Not only are reverse mortgages unfortunately often considered as an option of last resort, as Emile Hallez quoting Dr Wade Pfau points out in Investment News, but used strategically, they can be part of financial planning in retirement. When used strategically by high net worth homeowners, the reverse mortgage can end up leaving heirs with more than they otherwise might have.
With a reverse mortgage, the un-borrowed portion of the equity is guaranteed to grow, tax-free, at the same growth rate as the interest being charged on the mortgage balance. Unlike the case with traditional IRA accounts, that “growth” is not a “loan from the federal government”, and generates no tax liability. When the second of the two homeowners dies, heirs may refinance the home and keep it, or choose to sell it. (Whatever step up in basis tax rules in effect at that future time would apply.)
For high net worth home owners, housing wealth can play an important role in post SECURE Act planning.
https://mutualreverse.com/david-garrison
Readers, if you’d like to see what you might qualify for with a reverse mortgage in Indiana, or to download your Reverse Mortgage Guide Click Here (and scroll down).
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. David Garrison, NMLS ID 1595194. Mutual of Omaha Mortgage, Inc. dba Mutual of Omaha Reverse Mortgage, NMLS ID 1025894. 3131 Camino Del Rio N 1100, San Diego, CA 92108. Indiana-DFI Mortgage Lending License 43321. Michigan 1st Mortgage Broker/Lender/Servicer Registrant FR0022702. 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