2169 East Rutland Lane, Martinsville, IN 46151
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A recent discussion with your stepson (a highly successful professional who helps manage your affairs and whom you’ve named as executor of your estate) was centered around the home into which you and his late father had moved some forty years ago. While you hope to reside in these familiar surroundings for the remainder of your life, John made clear that he and his wife have little interest in ever occupying that home.
You also discussed the fact that. in just two more years, you are going to need to begin taking mandatory withdrawals from both your own IRA account and the IRA inherited from your late husband. Those withdrawals are certain to raise your level of federal income tax. For that reason, John is suggesting that you convert at least one of the accounts to a Roth. He’s asked your tax advisor run some Roth conversion numbers for you to consider.
Since your plan is to remain in the home for life, while at the same time your stepson has no interest in ever occupying it, a reverse mortgage might turn out to be of great benefit to you both. The very essence of a reverse mortgage is that there are no mandatory monthly payments. If payments are not made by the homeowner, the loan interest is “tacked on” to the loan and the balance continues to grow. There is no “danger” represented by this process, since, with a reverse mortgage, the house itself stands as sole collateral for the loan. Your own liability (and later, that of your estate) will always be limited to the actual value of the home at the time you cease to occupy it.
Assuming your reverse mortgage loan* replaces a traditional mortgage (also assuming that.you’ve remained in the home for the rest of your life), there could be thousands of dollars of tax deductions available to the estate, since, upon your demise, all remaining loan interest will have been repaid along with the principal. Those deductions could prove of enormous benefit to your heirs, including stepson John, offsetting both estate and income tax potential liabilities. **
Meanwhile, you might time both interest payments on, and withdrawals out of the reverse mortgage to offset Required Minimum Withdrawals from the IRA accounts. Alternately, you might defer the Roth conversion while allowing the interest to build up in the reverse mortgage, then use lump sum interest payments to offset part of the tax owed on the conversion.
* Reverse mortgages require that the homeowner maintain tax, insurance, and HOA fees and are available for the principal residence of homeowners 62 and over. Information shared is intended to be general in nature. Consult a tax professional for advice.
** In order for mortgage interest payments to be deductible, the loan must be categorized as being for the purpose of building, acquiring, or substantially improving your residence. This article is not intended to offer tax advice,and you should follow the guidance of your own advisors.