MarketWatch: What to Know About Using a Reverse Mortgage to Convert Retirement Assets

The tax implications of using a Roth Individual Retirement Account (IRA) to convert assets from a traditional retirement account may give some people understandable pause, however one potential solution for paying the associated taxes could be the use of a reverse mortgage. This is according to Stephen Resch, VP of retirement strategies at Finance of America Reverse (FAR) and an independent investment advisor in an editorial at MarketWatch.

“[T]apping into your home equity can provide the means to pay the taxes,” Resch writes. “You could leverage current low interest rates and get a home equity line of credit (HELOC), though many banks have stopped accepting applications for HELOCs in recent months. Additionally, a HELOC will require a monthly mortgage payment, decreasing your cash flow.”

This is where a reverse mortgage could come into play, which could help provide a means to pay the associated taxes and cash flow flexibility, Resch says.

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Steve Resch – VP of Retirement Strategies, Finance of America Reverse

“With a reverse mortgage, the available line of credit grows and compounds at a value that is tied to current interest rates,” he writes. “This can be particularly beneficial with a series of partial Roth IRA conversions as it provides a growing resource to pay future tax bills. The line of credit also provides flexibility to convert a greater portion of your retirement assets during market plunges, so you only pay taxes on the lower value at the time of the conversion and not on any gains in the Roth IRA when the markets recover.”

A reverse mortgage can provide that additional liquidity without the requirement of principal and interest payments as long as the borrower remains in the home, Resch explains. A reverse mortgage line of credit can be used to pay for the Roth IRA conversion without impact to a household’s existing cash flow.

“A good rule of thumb is to use a reverse mortgage if your home equity is less than or equal to the value of the retirement assets you plan to convert,” Resch says. “If the home represents a major portion of your net worth, a reverse mortgage may not be the best option to cover the tax bill. In this case, the reverse could better serve as a tax-free source of supplemental income, or to pay for in-home care, or other retirement expenses that distributions from the smaller invested assets may not be able to cover.”

Projected costs should also be actively compared with projected returns, Resch says, while projected returns from the Roth IRA conversion itself should also be taken into account.

“Of course, there are no guarantees on any projections, which is why you should consult a financial professional and evaluate your specific situation,” he says. “A number of ‘what if’ scenarios should be considered including changes in interest and tax rates, home and investment growth rates, and legacy desires.”

Read the article at MarketWatch.

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