Q. My wife and I are retired. We recently purchased a condo with the proceeds of our previous house, plus $43,000 from my IRA. I must pay back the $43,000 to the IRA within 90 days or it will be considered a permanent distribution for tax purposes.
I am trying to decide whether to accept the distribution or repay the IRA with funds from my variable home equity line of credit. The interest rate is 3 percent, or a payment of $182 a month for 30 years.
Our IRAs total around $800,000, invested 50/50 in index funds and bonds. Our monthly income is $6,000 from $3,000 IRA distributions and Social Security. We can afford the $182 payment, but the rate could change at any time, so we wonder whether it would be better to use the IRA funds instead. Your view? —R.B., by email
A. The best solution is to be flexible. Use the home equity credit line to repay the IRA distribution. Then decide when and how you’ll pay off the credit line.
It’s quite possible that paying off the credit line over two or three years will save you from the additional taxes you might have to pay for taking the $43,000 out in a lump. Remember, this amount would be added to the $72,000 in income you already have. This would bring your total income to $115,000.
The added income would make more of your Social Security income taxable, if not raise the tax rate on some of your income. You can get the exact tax changes by visiting a tax preparer, a CPA, or by using tax return software such as Turbo Tax.
Q. My question is: why do most financial planners not like reverse mortgages? —H.N., Austin, TX
A. In an ideal world everyone would retire with debt-free homeownership, a good chunk of Social Security, a pension from a secure lifetime job that they retire from by choice, and personal savings in retirement accounts and taxable accounts. Such people are rare, but not entirely mythical. Financial planners love them: they have assets to work with.
Reverse mortgages, on the other hand, are associated with millions of entirely non-mythical people. They haven’t had the good fortune to put together all those benefits and assets. Most people look to reverse mortgages because their home equity is their only resource/asset. Reverse mortgages have been used as a Hail Mary pass to win the retirement game. So reverse mortgages can have all kinds of after-the-fact problems.
For instance, just having a reverse mortgage doesn’t guarantee that you’ll never suffer a long or expensive illness, or a need for another car or expensive repairs for it. Nor is it guaranteed that a scheming relative won’t exploit you, that the house won’t need major repairs or some other life disaster.
This is why both Bank of America and Wells Fargo withdrew from the business. Some people with reverse mortgages decided to drop their home insurance, didn’t maintain their homes and forgot to pay their real estate taxes. So the banks were caught between a rock and a hard place. They could don the black cape of bad guys and tie thousands of old folks to railroad tracks by foreclosing on their homes--- or they could watch the properties be damaged or encumbered.
Today, revisions of the terms for reverse mortgages have reduced the danger of such miserable events. In addition, research in the financial planning community has shown that reverse mortgages may actually increase the size of a retiree’s estate.
If reverse mortgages have a problem it is that many people think that they magically create new income out of thin air. Or that they should be a free gift. They don’t, and they aren’t. They make the equity in your home available to spend. The price is that the money is borrowed. It earns interest that accumulates. The mortgage put retirees on one side of the table with compound interest on the other side, working against them.
Viewed in this framework, reverse mortgages are just another tool. The good news is that lots of people can use this tool.