Category: Income Tax

Reverse Mortgages Are Back in Style

One couple who wanted to live in a community for people 55 and older in an area they had always admired used a reverse mortgage to finance building their home in that development. 9-14-2016

The New York Times article, “The quiet comeback of reverse mortgages,” reports that reverse mortgages, which allow homeowners age 62 and older to tap into their accumulated home equity without facing monthly payments in return, have received a bad rap over the years because of abuses by lenders.

The volume of reverse mortgages decreased to about 30,000 this year from about 115,000 at their highest point in 2009. However, with reforms, they’re making a slight comeback and are viewed as a way of helping some retirees fill in the gaps in their future income. A reverse mortgage can provide cash or “longevity insurance” when other sources of retirement income dwindle. They also can be a source for out-of-pocket health care costs or other sudden financial needs. Similar to a conventional mortgage, a reverse mortgage obligation is met when the house is sold by the owners, the last owner has died or the home is sold by heirs. Any equity left over is kept by the last homeowner.

Also known as “Home Equity Conversion Mortgages,” these loans are insured by the government. The Federal Housing Administration makes up any debt owed from the final loan balance and net proceeds from the sale. You don’t have to worry about being “underwater” on the loan in case the home’s value is less than the mortgaged amount.

Reverse mortgages can give retirees with only modest savings but little or no housing debt the ability to stay in their homes and can provide a financial safety net for those worried about outliving their retirement funds.

A reverse mortgage can eliminate the burden of conventional housing debt, monthly payments of interest and principal, and can assure heirs that they wouldn’t be required to make up any losses if the home sold for less than the value of its mortgage.

Stricter regulation from the FHA and the Consumer Financial Protection Bureau—like mandatory counseling prior to lending—and lower costs have helped increased their popularity among seniors. Some folks don’t have enough savings to get through retirement, so they may use all of their wealth—including home equity—as a retirement income source. Others use reverse mortgages to create a cash buffer in the event a dip in the stock market depletes their retirement portfolio. Rather than selling stocks and funds when the market is down, they can use their home equity through a reverse mortgage line of credit to provide an income stream. One other rationale for seniors looking at reverse mortgages is to finance the costs of long-term care.

Although it can be a source of ready cash, a reverse mortgage isn’t for everyone. If you want to leave your home to your heirs by letting them sell your home at your death, a reverse mortgage will leave no equity in your home.

If you’re thinking about a reverse mortgage, do your homework and don’t be in a rush. Consult an elder law or estate planning lawyer for more information regarding how this might work for your situation.

Reference: The New York Times (July 2, 2016) “The quiet comeback of reverse mortgages”

The Importance of Beneficiary Designations

THV11’s recent post, “The importance of beneficiary designations,” explains that designating beneficiaries is a very important part of the proper handling of many documents—like life insurance, retirement accounts, bank accounts and investment accounts. Each of these may ask you to designate a beneficiary in the event that something happens to you. A beneficiary designation is your legal direction to the account administrator regarding who should get the money in your account if you were to die prior to using the money yourself. 8-26-2016

Many name a spouse or a child as a beneficiary but don’t realize that there can be legal issues to consider when making this selection. Also, it’s important to keep these choices up-to-date with changing circumstances.

As an illustration, some folks who have owned life insurance policies for a very long time haven’t looked at their policies in many years. When they review the policies, items of concern often pop up—like an ex-spouse or a dead relative still named as a beneficiary.

Retirement accounts—like IRA accounts, 401(k)s, and 403(b)s—require up-to-date beneficiary designations to be on file with the plan sponsor. With retirement accounts, typically the best primary beneficiary will be your spouse and the secondary beneficiaries will be your children.

However, if you have a trust created as a part of your estate planning strategy, the trust may be a beneficiary of last resort. That’s because there’s a difference in tax treatment of living persons vs. trusts.

Also, a living person is generally the right designation for a beneficiary of a retirement account, but a qualified charity could be a beneficiary of a retirement account. Speak with your estate planning attorney for help naming beneficiaries.

Reference: THV11 (July 5, 2016) “The importance of beneficiary designations”

Personal Finance Myths Debunked!

8-18-2016You want to prosper by following tried-and-true principles of effective wealth creation and asset management—not myths passed down from older generations or heard around the office water cooler. Kiplinger’s “8 Urban Myths of Personal Finance” unravels several urban legends of personal finance that have gained credence over the years.

Myth: There’s No Need to Start Saving for Retirement Until You’re 40. Did you know that 25% of Americans ages 30 to 49 have saved nothing for retirement and that 59% say they plan to save more aggressively “later” to make up for that shortfall? The long-term effects can be disastrous if you don’t put away money in a retirement savings plan as soon as you start earning a paycheck. The truth is the sooner you start saving and investing, the better.

Myth: Social Security Won’t Be Around When I Retire. Many people in the U.S. (55%) have this fear. The truth is Social Security isn’t going away. But remember that Social Security was designed as a supplemental retirement insurance program, not a pension per se.

Myth: I Can Borrow from My 401(k) When Needed. More than 20% of 401(k) plan participants who are eligible to take loans against their retirement savings had outstanding balances in 2012. But there’s a problem in doing this—you’re borrowing pre-tax dollars set aside in your 401(k) and paying the loan back with after-tax money. That money will be taxed once again when you withdraw from your savings after you retire! If you quit your job, are laid off or are fired, you’ll need to pay the loan back—usually within 60 days. If you can't pay it back, the outstanding balance is deemed a taxable distribution, and you’ll get dinged with a 10% early-withdrawal penalty if you are under 55. The truth is that while you are permitted to borrow from your 401(k) to make a down payment on a home or in cases of financial hardship, you’ll take a huge hit on your nest egg.

Myth: Only Rich People Need a Will. About one half of all Americans ages 55 to 65 don’t have a will. If you should pass away without one, a judge will decide how to divvy up your assets and who will raise your children. The truth is everybody should have a will, even if it’s just to detail funeral and burial wishes.

Reference: Kiplinger (May 2016) “8 Urban Myths of Personal Finance”