Financial Planners Often Overlook Reverse Mortgage Tax Advantages

image A recent article from Financial Planning discusses how retirees with 401(k)’s are faced with the question of how to structure their assets to avoid running out of money.  This becomes even more important with the turmoil in the financial markets and a reverse mortgage can be a great resource to help accomplish this.   

Some are calling this the next wave of retirement planning and it’s a great opportunity for advisors since these type of problems are too complex for most clients to solve on their own.  "The science of financial planning is shifting in this direction," says Brian Nygaard, managing director of Pershing in San Francisco. "I don’t think we are very far along yet as an industry, particularly in providing technical support, though individual advisors are working very hard to maximize results."

As planners get more focused on drawing down, optimizing the sequence of withdrawals could become more standardized.  Traditionally, tax hasn’t been factored into spend down computer modeling so there are only a few tools at planners disposal.  Most of these tools ignore certain asset classes all together such as real estate.  This is not just a modeling problem. Reverse mortgages, which have many tax advantages, tend to be overlooked as a tax-efficient source of retirement funds  


Typically, financial planners have a negative outlook on using reverse mortgages and strictly see them as a last resort kind of product.  As the reverse mortgage industry continues to educate more financial planners about the product I’m hoping we will see their outlook change.  

Tackling the spend down (Financial Planning)

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  • Even though the article is interesting, it is very confusing. It is uncertain if the confusion is the fault of the author, the editor, the participants, or a combination.

    To understand its tax uses, originators must understand the tax implications of reverse mortgage payments to the borrower (yes, it may not be tax-free) and the deductibilty of the interest that accrues (yes, not all interest that is paid may be deductible). For some this is a daunting task; at best it is not easy. Many financial planners do not understand income and estate tax implications that is why there has been little work in retirement considerations as stated by the author.

    The article was encouraging but much more information is needed in the hands of originators in order to advise the financial advisors on their suitability in retirement.

    Help may soon be on its way….

  • Mr. Veale,

    It would be appropriate if you would shed some light on the tax implications of reverse mortgage proceeds from the HECM program please.

    At the very least, what is your source showing tax implications of HECM proceeds?

  • Mr. Pecha,

    There are several articles that have been written on this subject but vary substantially in quality, based on the knowledge of the author not only in tax matters but as importantly, reverse mortgages. The best I have read was one published in a small accounting journal by a tax attorney; the difficulty with that article was that it covered only one aspect but did so very credibly. One of the very worst was written by a tax attorney for a leading California tax publication.

    In 1980 the IRS issued Revenue Ruling 80-248 covering the timing of the deduction of interest related to reverse mortgages. It provides no information regarding how much of the amount paid is actually deductible since the restrictions on home mortgage interest did not become law until the Tax Reform Act of 1986.

    Currently a major university is offering a six-hour credential program for originators that covers limited topics on tax. Since I have limited knowledge about the curriculum and the program, that university and its program will remain unnamed.

    You will find two articles on tax in recent NRMLA quarterly publications. There is a reasonably thorough outline on the tax implications of reverse mortgages for borrowers within the 2007 NRMLA Convention book held in San Diego.

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