They want to pay all cash for their new home by combining sale proceeds from the old house with money from their portfolio. You are concerned about the tax consequences to your clients if they liquidate investments, but you don’t want them saddled with a monthly mortgage payment either. How do you reconcile this?
Consider using a reverse mortgage to buy the new home. For homebuyers 62 and older who can make a sizeable down payment, HECM for Purchase can be used to finance the rest of the deal, and unlike a conventional mortgage, it will not require monthly principal and interest payments.
Using a reverse mortgage for purchase is another strategy that creates leverage and can make it possible to leave more investments in the market and ultimately available for beneficiaries.
Give More To Beneficiaries
Your client’s beneficiaries are in a higher tax bracket than your client and everyone wants to avoid income in respect of a decedent taxation down the line. You want to develop a strategy that converts all IRA funds to Roth IRAs between the ages of 62 to 70, but need a source of funds to cover the taxes while maintaining a low tax bracket.
Consider using a reverse mortgage line of credit. Adjustable rate HECM loans can be used to create a line of credit, similar to a HELOC, that does not require a monthly principal or interest payment.
With a reverse mortgage line of credit, a borrower has the option to withdraw funds and then repay the loan balance at any time without penalty. The flexibility makes this an ideal way to pay taxes on the IRA withdrawals that you’ll make before moving those into a tax advantaged Roth IRA. Working collaboratively with your client’s CPA/tax preparer will give you confidence of exactly how much IRA to convert to Roth each year.
Because reverse mortgage loan proceeds are non-taxable, these funds won’t push your client into a higher tax bracket. Another benefit of using a HECM is that the unused portion of the line of credit actually grows over time at the same rate as the loan balance. Retirement researcher Wade Pfau of the American College explains this well in an article for the Journal of Financial Planning:
“When funds are borrowed, the line of credit decreases and the loan balance increases. Conversely, voluntary repayments increase the amount of the line of credit, which will then continue to grow at the effective rate, allowing for access to more line of credit later on.”
For beneficiaries, legacy wealth is the remaining value of financial assets plus any remaining home equity after repaying the reverse mortgage, which is a non-recourse loan. Since money is fungible, the specific ratio of financial assets and remaining home equity is not important. Preservation of home equity is merely a psychological constraint and, like most negative investor behaviors, will lead to a less efficient retirement.