Forbes: A Reverse Mortgage Can Help Pay for a Roth IRA Conversion

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While likely only to work for wealthier individual retirement account (IRA) owners, using a source of nontaxable cash to fund an IRA conversion could be a viable choice for some retirees considering the currently low rate environment, and assistance handed down by the government to minimize the economic impact of the COVID-19 coronavirus pandemic. One source of this cash could be the home through a reverse mortgage, according to James Lange, CPA, attorney and president of Lange Financial Group, LLC in a new piece at Forbes.

“If you find yourself [as] a good candidate for a Roth conversion but with little or no money outside the IRA to pay for it, you ideally would find a nontaxable source of money to pay the taxes on the Roth IRA conversion,” Lange writes. “Let me propose an idea.”

That idea is to “let the home” pay the taxes on the Roth conversion, he says, translating to borrowing money from a bank or lender to pay the taxes on the conversion while putting the house up as collateral, he says.

“Current interest rates are quite low,” he says. “You can get a home equity line of credit (HELOC) or even a reverse mortgage if you are thinking of a series of Roth IRA conversions. The money from the loan or reverse mortgage pays the taxes on the conversion. You now have a Roth IRA [that is] growing tax-free without incurring taxes from cashing in the Traditional IRA to free up the money to pay for the conversion.”

While reverse mortgages have a struggling reputation in the minds of some, notable product changes have helped make the product category more attractive than it used to be in years past, he says.

“[Reverse mortgages] do not have the high costs and fees that they had years ago,” he says. “In addition, so many banks offer them that HELOCs and reverse mortgages have become competitive products.”

Using a reverse mortgage could’ve also made a difference for some of his clients who were worried about what they would leave behind to their children, he says.

“The moral of the story is that the money you get from a home equity line of credit or reverse mortgage doesn’t have to be used to pay the taxes on a conversion,” he says. “But consider this: if [my clients] had used the proceeds from the loan to pay for a series of Roth IRA conversions, they would have had a much bigger Roth IRA that would be extremely beneficial for the children.”

Not many people are comfortable with the idea of owing money at the time they pass away, and the strategy could negatively impact people who use it if the market declines, he says. That is why a trusted advisor known by the potential client should always be consulted before a big decision is made, he says.

“Before taking action, we would recommend you consult with a trusted advisor who could fully analyze your financial position and ‘run the numbers’ to help you with your decision,” he says.

Article by Chris Clow on