WSJ: Use Reverse Mortgage to Increase After-Tax Wealth

Using proceeds from a reverse mortgage could help retirees strategically maximize the after-tax value of their wealth, according to a recent column in The Wall Street Journal. 

In his column, Wade Pfau — a professor of retirement income at The American College in Bryn Mawr, Penn. — suggests that reverse mortgage proceeds can boost spending without increasing taxable income. 

Comparing reverse mortgage proceeds to those from a Roth IRA, Pfau writes, “Roth distributions can be useful to fill in income needs without entering into a higher tax bracket. Roth distributions do not count as part of taxable income, and they do not count on the income used to determine the taxability of Social Security benefits.”

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Though fairly new to the industry, Pfau has championed reverse mortgages in previous articles, noting that financially responsible individuals can improve their retirement sustainability with the loan. 

Read his recent column here

Written by Emily Study

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  • Emily, you state: “Comparing reverse mortgage proceeds to those from a Roth IRA” but the remainder of that paragraph only presents Roth principles without any comparison to HECM proceeds.

  • Either the author is not familiar with the taxability of nonrecourse mortgage forgiveness or he choose not to address it. Reverse mortgages have contingent taxable income implications if the HECM is not paid in full at termination by the borrower; the rules for estates, trusts, and heirs are not the same. Of course HECMs can result in income tax benefits as well if any portion of the accrued interest or MIP can be deducted as long as federal and state income tax liabilities are reduced as a result.

    Roth IRAs cannot result in any income tax benefits beyond their income not being subject to income tax but if the required time period for tax-free distributions has not been met, some of portion of the distributions will be subject to income tax.

    Cashing in a life insurance policy before the insured passes can result in a portion of the proceeds being taxable as well. Simply borrowing against the policy will not generally result in taxable income as long as the interest rate meets minimum IRS standards and amount is repaid in full.

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