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SMART MONEY: Reverse mortgage can help stave off taxes

by on March 16, 2014 1:50 AM

DEAR BRUCE: I am a mortgage lender considering working full-time in the reverse mortgage market. I saw your column yesterday answering a reverse mortgage question. You seem very knowledgeable and I was hoping to pick your brain a little to understand if this is the right niche for me to work in.

When I look at the possibilities of a reverse mortgage for the more affluent buyer, what I come up with is this: If a client takes out a reverse mortgage for, let’s say, $200,000, he pays about 5 percent in origination fees and, currently, 5 percent in interest rates. This will rise and fall with the market. If the client were to take $200,000 out of his 401(k), he would probably be taxed on that at about 28 percent federal and 9 percent state, or 37 percent total.

In a situation like this, the reverse mortgage is a good strategy, or so it seems. I need someone on their financial game to poke holes in this line of thinking so I can understand the product and see if it is something I truly believe in. Can you help me? — M.B., via email

DEAR M.B: Right on! Your thinking is absolutely solid. If the $200,000 came out of the 401(k) and likely is taxed at 28 percent and 9 percent, that’s a big, big bite, but sooner or later the taxes are going to have to be paid. It may very well be that the reverse mortgage is the way to go, but let’s take this in chunks.

There is no tax on reverse mortgage proceeds; we both know that. You postponed the 28 percent and 9 percent that you assumed, but not in anyway have you gotten rid of it. Sooner or later, as you mature, the money will have to come out of the 401(k) and the taxes will have to be paid. You want to figure out how to pay the least taxes over a long period of time. While there are expenses involved in a reverse mortgage, you will postpone taxes, which has several consequences, not the least of which is that the money will still be in the 410(k) earning interest to offset the interest you are paying on the reverse mortgage.

I have no problem going into that enterprise, and you show some remarkable knowledge in what you have outlined to me. You’ll see many different people offering you information on reverse mortgages. By all means get the brochures and study them carefully before you decide.

DEAR BRUCE: Does a person with no assets need a will? I rent. My income is from Social Security and a small pension. I have an automobile loan and no other debt. I have an insurance policy of $40,000 payable to my son upon my death.

I have a will from years ago when I owned a home and mutual fund accounts. Those accounts are at zero, and I no longer own a home. So, really, the will has no value. I have already given everything to the people I want to leave things to. — E.D., via email

DEAR E.D.: No, you don’t need a will, but it certainly would be wise to have one. Putting aside that you have very few assets and you have an insurance policy payable to your son, you state that all of the things mentioned in your will no longer have an effect, and I agree with that. But the fact is that you may come into some money. One example would be if you were killed by someone carelessly. Then, you should have a simple will leaving everything to your son.

In the event that there is nothing to pass along, he doesn’t have to file the will for probate. He can just file it and forget about it. On the other hand, if the estate has accumulated some assets or some liabilities that have to be met, it will be wise to have everything spelled out. A simple will should cost no more than about $200.

Send questions to Questions of general interest will be answered in future columns. Owing to the volume of mail, personal replies cannot be provided. The Bruce Williams Radio Show can now be heard 24/7 via iTunes and at It is also available at
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