With a reverse mortgage loan, the clients of financial planners can access the home equity that they have built over the years but can’t monetize. While home equity is certainly good, it isn’t necessarily the best form of wealth for everyone.
1. Reverse Mortgage Loan Proceeds Are Tax-Free Money.*
No matter how big the loan proceeds, and no matter how it is received—lump sum, monthly, a line of credit, or combination—every dollar is income tax-free.* These payouts are considered loans, not income, which makes them off limits to the IRS and ideal for reducing the use of taxable income from other sources.*
2. Eliminating Monthly Mortgage Payments and Other Interest Bearing Debt
For retirees, debt can lead to heightened cash flow concerns and increased nest egg withdrawal. Unfortunately, 40% of homeowners 62 and older have a mortgage of about $1,000 per month to pay, and that age group carries trillions of dollars of total debt.1 With reverse mortgage loans, any remaining forward mortgage debt is paid off, and the leftover funds can be applied to other debt as a part of a financial plan. Afterward, the homeowner is never obligated to make monthly mortgage payments. However, payments can be voluntarily made as part of a tax reduction strategy*. The borrower must still pay taxes, and insurance, and maintain the home.
3. Maximizing Interest Deductions and Stacking Tax Deductions*
With a reverse mortgage loan, your clients can make mortgage payments when they want to, not when they have to. This enables them to let the interest build up so deductions can be “stacked” together. So at tax time, they can increase itemized deductions, or apply this to potential deductions in a year of higher income or required minimum distributions.
4. Strategic Deferment of Taxable Retirement Income*
Non-taxable reverse mortgage cash could enable clients to withdraw money from their IRA in the lowest tax bracket percentage. If you have clients in the Medicare gap, a lower taxable income might help them receive lower insurance premiums through the ACA or even enable them to qualify for Medicaid.
5. Increase Their Cash Flow While Increasing Your AUM
For clients with monthly mortgage payments with limited liquidity who are struggling to cover their expenses, the elimination of monthly payments and infusion of cash can make a tremendous difference in their quality of life. But even for clients who are generally satisfied with their cash flow before a reverse mortgage loan, the tapped home equity can be used to manage a sequence of returns, leveraged as capital for portfolio investments, or applied to a number of strategies as a part of your financial planning*.
How Many of Your Clients Could Use These Advantages?
If reverse mortgage loans are a new product category to you, consider how many senior citizens struggle for cash flow or simply do not have the cash flow to fully enjoy their retirements. For either of these groups, market volatility or unexpected living expenses could prove detrimental to the quality of life. The ability to integrate home equity into your clients’ financial planning process offers a host of unique advantages for many retirees.