Will a Reverse Mortgage Help Me in Retirement?

It’s not uncommon for a homeowner to take out a home equity line of credit or borrow against an existing one. This can provide the funds to pay some bills and stay afloat.

Another option if you’re at least 62 with a home that’s not heavily mortgaged, is to take out a reverse mortgage. A revere mortgage gives you tax-free cash. No repayments are due, until you die or move out of the house.

However, these loans are expensive. In addition, reverse mortgages aren’t for those people who want to give their home to heirs, because most or all of the home’s equity may be eaten up by the loan principal and interest.

Fed Week’s recent article entitled “Considerations for Borrowing in Retirement” explains that reverse mortgages work best for seniors who need cash, who want to stay in their homes and who have few other options.

These HECM reverse mortgage loans are insured by the Federal Housing Administration (FHA). They let homeowners convert their home equity into cash with no monthly mortgage payments.

After getting a reverse mortgage, borrowers are still required to continue to pay property taxes and insurance. They also must maintain the home, according to FHA guidelines.

People use reverse mortgage loans to pay for home renovations, as well as medical and daily living expenses. Some homeowners who have an existing mortgage will use their reverse mortgage loan to pay off their existing mortgage and get rid of their monthly mortgage payments.

When the homeowner moves, sells the house, or passes away, the loan becomes due. If the house is held until death, heirs have the option to take out a conventional mortgage, pay off the reverse mortgage and continue to live there.

Other options include loans against your life insurance or your securities portfolio.

Ask a qualified estate planning attorney or elder law lawyer how a reverse mortgage might fit into your situation.

Reference: Fed Week (May 16, 2019) “Considerations for Borrowing in Retirement”

Suggested Key Terms: Estate Planning Attorney, Financial Planning, Elder Law Attorney, Retirement Planning, Life Insurance, Reverse Mortgage

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How Will Billionaire Robert F. Smith’s Help of Morehouse College Student Loans be Taxed?

Billionaire Robert F. Smith told nearly 400 graduates of the historically black, all-male Morehouse College in Atlanta at their May graduation ceremony that he would pay off those loan obligations, so they were free to pursue their next chapters. The gift is believed to be worth $40 million.

Graduates likely won’t face any tax liabilities on the money. The IRS will consider the money a “gift.” The IRS policy is “no tax on receipt.” This means typically the person who receives the gift doesn’t have to pay tax on it.

Fox Business’ article “Will the IRS tax Robert F. Smith’s gift to Morehouse grads?” explains that the lender didn’t forgive the debt, so there’s no cancellation of indebtedness income. The students also didn’t do anything to “win” the debt repayment, such as winning a lottery or another competition.

However, Smith’s situation might be a little more complicated, depending on how he plans to pay the debts.

A gift is generally not considered deductible, unless it’s given in the form of a charitable contribution. So if Mr. Smith were to pay the checks directly from his personal account, he wouldn’t be able to claim a deduction. However, he could structure the payments in a way such that he’s giving the money to a charitable organization. This could be giving it to the school for the specific purpose of paying the students’ loans. In addition, Smith could create a private foundation and transfer the money that way.

To use a charitable deduction, Smith would have to give the money to an established charitable organization.

Another option is for Smith to claim that he made the decision to advance his business reputation with the thought of raising income for himself or his business. He started the private equity firm Vista Equity Partners and has an estimated net worth of $5 billion, according to Forbes.

The gift tax exclusion amount in 2019 is $15,000 per year. This means that gifts up to that amount are not usually taxable. For gifts above that, the giver may be required to fill out a Form 709, or gift tax form.

Research shows that outstanding student loan debt has doubled over the past decade to more than $1.5 trillion in 2018. This debt is now second only to the amount of mortgage debt held by Americans.

Reference: Fox Business (May 20, 2019) “Will the IRS tax Robert F. Smith’s gift to Morehouse grads?”

Suggested Key Terms: Charitable Donation, Tax Planning, Financial Planning, Gift Tax, Student Loan

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Even a Late Start toward Retirement is Better than None at All

There are also people who wait until they become senior citizens to begin planning for retirement. That’s a little on the late side, but the important thing, says the article “Retirement Planning: Start now to help Social Security, Medicare” from Martinsville Bulletin, is to get started. That’s better than doing nothing.

It’s easier if you start earlier. Let’s consider the high school student who diligently puts away 10% of a $7.25 per hour gross minimum wage earning for a year on an average 20-hour work week. That’s $750 into a retirement plan after one year. If that student never went to college, never learned a trade, got a raise or a promotion, they would still have $34,600 in personal savings in 46 years. It’s not a lot, as retirement savings go, but it’s better than nothing.

If the same high school student put those savings into an Individual Retirement Account (IRA), more would have been saved. The more time your money has to grow through compounding, the more money you’ll have.

Saving a little money every month could make a big difference later on. This year, the average monthly Social Security benefit rounds out at about $1,460 per person, calculated by combining a worker’s highest paid years in the workplace. That’s not enough for retirement. The answer? Start saving early.

It is not as easy to build a nest egg in a few years, but it’s possible.

Many people don’t wake up to the reality of retirement, until they reach age 62. There’s still time to plan. They can put money into IRA accounts, and at age 62 they can save as much as $7,000. Those IRA contributions count as tax deductions.

Roth IRAs are a little more flexible, but there are no tax deductions with contributions. On the plus side, when money is withdrawn, you’re not paying taxes on the withdrawals.

Another important planning point for seniors: if you’ve had health issues, it’s a good idea to keep working to maintain your employee health insurance. The healthier you are, the lower your health insurance costs will be during retirement. However, health costs do tend to increase with age, so that has to be factored into your retirement planning.

For people who take a lot of medication to control chronic conditions, they’ll need to look into health insurance outside of the workplace. That usually means Medicare. Most seniors are eligible for free Medicare hospital insurance, which is Part A of a four-part option, if they have worked and paid Medicare taxes.

Part A helps pay for inpatient care in a hospital or skilled nursing facility after a hospital stay, some home health care and hospice care. Part B helps to pay for doctors and a variety of other services. Part C allows HMO, PPO and other health care organizations to offer health insurance plans for Medicare beneficiaries. Part D provides prescription drug benefits through private insurance companies.

The Social Security Administration advises people to apply for Medicare three months before they celebrate their 65th birthday, regardless of whether they plan to start receiving retirement benefits right away.

Whether you’re 26 or 56, you need to plan for retirement. You also need to have an estate plan, and that means making the time to meet with an experienced estate planning professional to discuss your life and your retirement plans. You’ll need their guidance to create a will and other documents.

Advance planning will always be better than waiting until the last minute, for retirement and estate planning.

Reference: Martinsville Bulletin (May 17, 2019) “Retirement Planning: Start now to help Social Security, Medicare”

Suggested Key Terms: Retirement, Social Security, Medicare, Individual Retirement Accounts, Roth IRAs, Estate Planning Attorney

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