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#62 Using a Reverse Mortgage to Avoid Tax on Social Security


David Garrison
Home Equity Retirement Specialist
NMLS # 1595194
Serving the State of Indiana
p (317) 644-2595 c (765) 516-0130
e [email protected]

2169 East Rutland Lane, Martinsville, IN 46151
Corporate NMLS #1025894

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As financial advisor, a primary concern of yours is helping clients manage, protect, and grow their assets. For those at the brink of, or even already into retirement, one important decision involves the timing of social security benefits. Wade Pfau (December 1, 2021 issue of Financial Advisor) aptly described the situation as the Social Security Tax Torpedo, referring to the fact that up to 85% of Social Security benefits can be counted as taxable income. For clients with the means to generate sufficient retirement income while deferring Social Security benefits, the torpedo “hit” can be successfully deferred, and, as you explain to clients, the benefits will be increased for every month of delay beyond their “full retirement age”.

Unlike most of your clients who are following your advice to deter Social Security benefits, Ron and Sue are not willing to defer (nor, given their overall health and financial situation would that be advisable). They will be retiring in June 2022, and, while Ron will have some pension income, the rest of this couple’s income needs will need to be satisfied out of the combination of invested assets and Social Security. Fortunately, Ron and Sue have little to no debt, and their home is in very good repair and almost fully paid for.

The results of a study conducted by the Center for Financial Security sounds as if it was patterned after “Ron” and “Sue”. “Our findings highlight the critical role of housing wealth for the economic security of SSA beneficiaries and the use of mortgage borrowing as a vehicle to smooth consumption following a health shock.” Consider recommending to your clients that they use their housing wealth to generate tax-free income in the form of a reverse mortgage, or a HECM (Home Equity Conversion Mortgage.)

As Charles Rawl, CFP®, RICP® wrote in Kiplinger, “This is no time to be stuck in conventional wisdom paradigms… The intelligent use of a reverse mortgage, particularly a federally insured HECM line of credit, could extend an individual’s or couple’s retirement resources in a way that more traditional strategies cannot.”