creating tax-free income in retirement could be as important as ever in the coming decades
in my opinion as the bill comes due on the massive amount of borrowing to fund the spending needs of
our government tax rates have only one direction to go and that is up taking steps to prepare for
the future is smart and that's why in this video I'll explain why a reverse mortgage could be a
crucial part of a financial plan in the right situations reverse mortgages allow Americans
62 and over to borrow money against the equity in their home with no obligation to repay it as long
as they live there because you are tapping home equity the proceeds come tax free to
the borrower once the home sells the lender is paid back in full from the proceeds of the home
are you a candidate to add a reverse mortgage to your financial plan stick with me as i
explain part 8 of my series creating a 100 tax-free income stream in retirement
this video is about how reverse mortgages can deliver a tax-free income stream potentially
increase your net worth keep social security from being taxed and avoid IRMA surcharges on medicare
Colin Exelby will be here and i provide financial planning for business owners and
their families that just makes sense i own the financial advisory practice celestial
wealth management and provide advice virtually to clients all over the country reverse mortgages
what are they why are they important to a financial plan who do they make sense for and what
to look out for you keep watching we're going to discuss these now if you are watching this video
i know you are researching ways to maximize your after-tax retirement income and net worth
in this video i want to provide you with the knowledge to know whether you
are a good candidate for a reverse mortgage this is a good spot to point out important disclosures
the information in this video is for educational purposes this is not specific financial planning
or investment advice in addition everyone's tax situation is different you should discuss your
tax situation with a qualified tax advisor before implementing any planning strategy
first what is a reverse mortgage a reverse mortgage is a type of loan that's designed
to give people age 62 or over access to the equity that they've built up in their primary residence
without having to sell it to be clear you can only get a reverse mortgage on the home you
are living in unlike a regular mortgage in which the homeowner makes payments to the lender with a
reverse mortgage the lender pays the homeowner now you have the option to receive a lump sum
a line of credit or a series of payments over time but you don't have to pay the loan back
you can if you choose to do so it's nice to have that flexibility you'll hear that word
a lot the loan balance accumulates interest over time similar to any other mortgage at the stated
rate on the loan and we will talk about how that impacts the financial plan in a little bit
the key part to understand is that the loan must be repaid when the borrower dies moves out
or sells the home and that's just like any other mortgage reverse mortgages are often called home
equity conversion mortgages or HECM for short and they're administered and regulated by the
U.S. department of housing and urban development or HUD as many people know it it's a great way
to provide flexibility to a retirement plan since the distributions are alone of your own home
equity guess what they are not included in your adjusted gross income reported on your tax return
you know what that means that means they don't count as provisional income they don't trigger
high income Medicare premiums or the taxation of social security benefits huge government
insurance is required and is provided through the federal housing administration or FHA they're also
a part of HUD this backstop provides critical assurances to both the borrower and the lender
insurance foreign HECM reverse mortgage guarantees the borrower funds if the lender goes out of
business and it ensures the borrower will never owe more than the value of the home when sold
let me say that again since that is really important if the housing market declines
the borrower will never owe more than the home is worth when it is sold the borrower gets what is in
effect a tax-free advance on their equity in the form of a line of credit fixed monthly payments
or a lump sum but the borrower must also continue to pay the real estate taxes
homeowners insurance and the cost to maintain the home just like any other mortgage all right so why
reverse mortgages important to a financial plan one word flexibility when you reach what i call
the retirement red zone the five years before retirement and the five years after retirement
you're in a very important zone for the success of your retirement plan the ability to tap different
assets to pay for retirement living expenses in a tax efficient manner increases the success
rate of your financial plan for many retirees a good portion of the retirement assets are sucked
away in tax deferred retirement accounts like traditional 401ks and IRAs i just talked with
someone today about this over 90 percent of their assets are in these traditional 401ks and IRAs
guess what these assets have likely never been taxed so what happens when you go to withdraw
them well when they're withdrawn they're taxed at income rates and they contribute to provisional
income that can make social security taxable and increase your Medicare premiums as retirees get
close to and start drawing on these assets the last thing that you want to see is a significant
market downturn like what happened in 2000 to 2003 or 2007 to 2009 you probably remember those
periods well or at least saw your parents deal with them of course there is no way to predict
if or when a major stock market decline will occur why is this so important to avoid in
your retirement red zone well if stocks decline significantly and you're forced to sell them low
because you need funds to live you lose the ability to wait out their eventual rebound
for that reason having an ability to access other assets like a reverse mortgage can help reduce the
chance of running out of retirement funds early in essence if markets were down and you had access to
a reverse mortgage you could potentially use those funds tax-free remember until the stock market
recovers and then tap the retirement accounts you could even elect to tap those accounts and pay
back the home equity you took out if you wanted to there's nothing in a reverse mortgage that says
you can't a second reason reverse mortgages can be so important to a retirement plan has to do with
the taxes and surcharges these are what i like to call stealth taxes because they creep up on you
without realizing it in previous videos in this series we talked about the changes to the current
tax brackets and the chances the tax rates rise significantly from here currently there are two
significant jumps in the tax bracket at certain income levels from 12 up to 22 percent and from 24
up to 32 percent if your social security pension or other income each year comes to the middle of a
tax bracket and retirement account withdrawals would push you into a higher tax bracket
it can be beneficial to use assets like a roth IRA and a roth 401k or home equity through a reverse
mortgage to keep your income out of those higher brackets paying loan interest can be a lot less
than paying significantly higher taxes from creeping into a higher tax bracket
this is where sophisticated retirement income planning can potentially save you taxes at 22
percent 32 percent or even more earlier i mentioned IRMA and i'll be releasing a video
shortly explaining IRMA in more detail basically IRMA is the medicare income surcharge for 2022
individuals with income over 91 000 a year and married couples with income over 182
000 a year pay a surcharge that's added to their medicare part b and part d premiums you can see
those additional monthly charges here and if your income is higher you will pay even more
this is also harder to plan for because the surcharge is based on your magi income
from two years ago if you are in these brackets either because of significant investment income
retirement distributions pension income or rental income keeping your income below these levels can
not only save you money on taxes but also on medicare premiums additionally later on in life
it's most likely that if you're a married couple one of you will outlive the other
but you will still have similar income similar expenses and similar assets the surviving spouse
will be assessed what i call the widow's penalty remember in earlier videos when i jokingly said
to get married well there are just a ton of benefits on the tax side for married couples
probably also on the emotional side the widowed spouses will now most likely be in the single
tax bracket for the rest of their life unless they remarry that means potentially higher income taxes
capital gains taxes and IRMA surcharges because you move from married filing jointly to single
the reverse mortgage can be a huge benefit to the widowed spouse to keep their income down
and avoid IRMA surcharges who do reverse mortgages make sense for all right now that we know many of
the advantages of reverse mortgages let's discuss who they are most appropriate for
actually the better way to answer this question is to outline who they are not for if this is not
your primary residence you cannot get a reverse mortgage second if you are not yet 62 years old
you cannot apply for a reverse mortgage and third if you believe you're going to sell your home in
the near future to move somewhere or downsize i think a reverse mortgage on your current home
may not be the best option because of the costs involved so who do they make sense for ideally
they make sense for someone who plans to stay in their home for the rest of their life and is
looking for flexible ways to access tax-free cash in retirement first if you're single as i said you
must be over the age of 62 to qualify if you're married only one of you must be over the age of 62
but all borrowing qualifications will be based on the younger spouse's age that's important if
you have a wide age difference between the two of you if you're married it is mandatory that
both of you are listed on the loan but that's also good for financial planning purposes now
many times people think that using home equity is the last place you should go for retirement funds
i am here to challenge that thinking i talk a lot about flexibility in my financial planning
videos and that's because we don't know what financial markets will do in the future
what unexpected health scares we will have what tax rates will be or what the world will have in
store for us who thought we would have a pandemic not many people so proactively creating access
to various assets allows us to customize where we get funds in retirement and when
this can potentially lower taxes significantly in retirement and can allow you to avoid having
to sell stocks to live on during a downturn even CNBC personality and PBS host Suzie Orman recently
said on her show that accessing a reverse mortgage is often a better option than selling stocks when
they've declined or paying capital gains taxes well duh that seems to make a lot of sense to me
all right now that we know who a reverse mortgage candidate is let's fast forward a minute what
happens when a reverse mortgage borrower does pass away after a borrower passes away the heirs
take over the responsibility of repaying the reverse mortgage balance typically heirs simply
sell the house and use the proceeds to repay it proceeds from the sale of the home will always
cover the entire repayment amount even if the loan balance is higher than the sale price of the home
as a non-recourse loan no other assets of errors can be taken by lenders to repay the reverse
mortgage that is huge and an often overlooked part of financial planning now while most heirs
plan to sell their parents homes if the heirs prefer to keep the home as an inheritance they
only have to repay 95 percent of the loan that's a nice advantage alright so what to look out for
number one watch out for pushy salespeople recommending a reverse mortgage without really
knowing your financial situation if it sounds like they're selling a reverse mortgage to anyone with
a pulse run as fast as you can the other direction work with a knowledgeable financial planner
who knows your situation number two scrutinize the cost of the loan so you know what they are
but don't dwell on them i've seen a number of misinformed people talk about the high borrowing
costs of a reverse mortgage as a reason not to pursue them well as with any loan there is an
underwriting process to determine if the borrower has the financial means to pay for the loan
traditional mortgage loans are known to have mandatory closing costs and fees and reverse
mortgages are no different both loans require expenses and closing costs and since reverse
and traditional mortgage closing costs include many of the same types of fees
the overall expenses are often very comparable what is the major difference the major difference
is that reverse mortgage borrowers will often need to pay insurance on the loan to the FHA
this is what backs the loan if housing prices don't keep up with the loan value in my opinion
it's a small price to pay for the peace of mind of not owing more than the home is worth when
it's sold now that you know all about reverse mortgages and their tax-free income benefits just
click here for the next video in the series how to create a 100 tax free income stream in retirement
if you want to start from the beginning of the series just click this video get clear be clear