header photo Mesa 4/6/2017 11:00:00 AM
News / Finance

Reverse Mortgage for Retirement Income

Tax Favored and Strategic Use of Reverse Mortgage Income

Under HUD and insured by the FHA, a home equity conversion mortgage (HECM) can be a significant asset for retirement planning, especially a reverse mortgage for tax-free income. Tax-free reverse mortgage income is based on the equity position of your home, your age and the intent to remain in your home for life. Because equity loans are not characterized as income, the loans are not taxable and are not includable in the provisional test for Social Security benefit taxation. That could be a fundamental foundation for many Americans seeking more spendable income during retirement. But reverse mortgage income has other applications that can further enhance revenue in retirement.

Many near retirement have apprehensions that the Social Security program will not be modified or funded adequately to remain sustainable over the next 20 to 30 years. Some seniors say, “After all the country is going to hell in a hand basket and you’ve got to get while the gettin’s good.” Those concerns are somewhat warranted, but they are not a reason to take Social Security benefits at age 62. But if you’re seeking to retire at age 62, you could receive tax-free income from a reverse mortgage and delay your Social Security benefits until age 70 when your benefits are maximized for both you and your spouse for life. A reverse mortgage may generate enough income to also delay your retirement or pension plan, allowing it to accumulate over another market cycle.

Many seniors purchase highly rated muni bonds for tax-free income, but are they tax free from federal, state and local municipalities? And is there any chance that purchasing a significant amount of municipal bonds could trigger the alternative minimum tax? But one thing is for sure; municipal bond income is includable in the provisional income test for Social Security benefit taxation. Social Security benefits are taxed at ordinary income rates. It could be the ultimate irony that a senior purchasing municipal bonds for tax-free income ends up triggering an ordinary income tax on his Social Security benefits.

So tax-free income from a reverse mortgage can increase revenue and remain uncorrelated to Social Security benefit taxation. This is a great option for seniors to consider in their retirement plan.