Using a reverse mortgage line of credit to purchase a deferred annuity, to use a combination of monthly line of credit drawing and post-deferral annuity payments, could have a significant impact on the longevity of a borrower’s retirement finances and the tactic is heavily opposed by insurers. A change in federal tax law to remove taxes on pension payments fully funded by reverse mortgages could be one possible answer to that problem, according to Jack Guttentag, also known as the “mortgage professor,” in a new column under Forbes.
“[I]Insurers today regard reverse mortgage-funded pensions as “unsuitable” and will not accept them, “writes Guttentag. “As a result, retirees today can only use the combination of credit line and pension through cunning. A determined retiree can deposit the funds drawn on the line of credit into a bank deposit or investment account and then identify that account as the source of funding for the annuity. Such cases are very unusual. “
One of the main reasons insurers view reverse mortgage-funded annuities as an “inappropriate” arrangement is to “switch” from untaxed payments to taxable payments because an annuity purchased with reverse mortgage loan proceeds is treated as “not” -qualified purchase, which then opens the annuity payments in excess of the tax exposure premium paid, he says.
“Eligibility concerns would largely go away if federal tax laws were changed to eliminate taxes on pension payments that were fully funded with reverse mortgages,” says Guttentag. “In fact, this change to the tax code would be a federal sanction for HECM / pension combinations. There are also precedents for such action: 4 of the 8 states that currently exempt pension payments from pensions bought with funds from IRAs, 401Ks, and 403bs. “
While there is an abundance of crises the government has to grapple with today, this is a potential avenue to address the looming retirement crisis and the number of housebound / cash poor seniors on the verge of transitioning into fixed income lives stand. Good day says.
“[M]American illusions are fast approaching retirement because most or all of their assets are in their homes, ”Guttentag writes. “Treating HECM-funded pension payments as tax-free could increase the resources available to these distressed retirees during a period of their lives when those dollars matter most. There would be no loss in federal tax revenue as the number of credit line and annuity combinations currently written is negligible. And because the tax [ex]The emission would result in more annuities being written. In the 8 states that are now taxing annuity premiums, revenues would increase. “
read this pillar at Forbes.