Though the HECM reverse mortgage has been around for a long time, it’s only in more recent years that reputable media sources and financial advisers have started to recognize the potential benefits of a reverse mortgage for many retirees. No longer is it a financial tool only for the needy and desperate (though it can often help such people), it also can be very beneficial for people who are more well off.
Marketwatch recently published an article detailing 11 great ways retirees can reduce income taxes. One of the tips was the following:
Is a reverse mortgage for you? Horowitz describes a retired couple who are paying a 25% tax rate on their IRA income.
Payments from a reverse mortgage on their condo would let them reduce their IRA distributions, Horowitz says, and thus reduce taxes. “Effectively they can get payments for the rest of their life and those payments may even exceed the value of their condo,” he adds. “When they pass away, the bank gets the condo and that’s it.”
A HECM reverse mortgage is a home loan designed to give seniors 62 years of age or older access to a large portion of their home value without having to take on a mortgage payment or give up ownership of the home. As long you pay required property charges (property taxes, homeowners insurance, HOA dues, etc.) and live in the home no payment is required and the loan does not have to be paid back. Proceeds can be distributed as monthly term or tenure payments, line of credit, lump sum, or some combination of all of these.
One big advantage of the reverse mortgage is that the proceeds are not taxable. Because it’s mortgage money and there’s an expectation of repayment someday (though not in your lifetime), the IRS doesn’t consider it income for tax purposes.
If you’re relying on taxable assets like IRAs or 401Ks to fund your retirement, a reverse mortgage could offer you a way to preserve your cash assets, maintain your lifestyle, and reduce the income taxes you pay to Uncle Sam. And I don’t know about you, but I like to keep my money out of Uncle Sam’s hands whenever possible :).