Using a Reverse Mortgage to Reduce Taxable Income

With tax season just around the corner, I thought it would be prudent to share some financial planning strategies for your “silver haired” clients.?

Here are 3 ways financial advisors are helping their clients reduce taxable income by using a reverse mortgage:

1. Providing a non-taxable alternative to using registered investments for a major purchase.?

It may be tempting for your clients to simply cash in their RSP’s to make a major purchase, but this is a costly mistake. First off, your clients are taxed at source, so if they need $250K for that condo in sunny Florida, they’d need to withdraw $500K from their RSP. And history has proven the longer your clients stay invested, the greater return on their investment. So, the next time your clients need to buy a new car or want to redo their kitchen, talk to them about the advantages of using their home equity instead!

2. Extending the life of a clients’ RIFF by setting up a monthly advance from the reverse mortgage.?

Did you know that a CHIP reverse mortgage can be set-up to deposit a monthly $ amount into your client’s bank account? A lot of high-net-worth clients set their monthly RIF withdrawals to support lifestyle, which is perfectly fine (after all, people work hard for their money). But if your clients are taking more than $3000/month from their RIF, it might be time to discuss setting up a reverse mortgage with a monthly draw. Even using $1000/month from their home equity will extend the lifetime of their overall book and reduce their annual taxable income, which can eliminate OAS claw backs and improve overall net worth by reducing annual taxes.

3. Investing the reverse mortgage proceeds thereby making our interest tax deductible.?

I recently met with a client who was “house-rich and cash-poor”. She told me she was forced to go to foodbanks at the end of each month because she literally had no way to afford to pay for groceries. Her house was worth over $900,000 dollars and she had about $50,000 in credit card debt. The financial advisor who referred the client, recommended that she pay off her credit cards and invest the proceeds in a mutual fund that would pay a monthly $ amount. Her $350,000 investment generates appx. $1750/month income. Interest on the reverse mortgage, although not payable, is now tax-deductible, making this a highly tax-efficient strategy to increase her monthly income and eliminate the need to rely on foodbanks.??

In summary, a reverse mortgage is a tool that can be used to help clients stay invested longer, reduce taxable income, and increase overall net-worth during retirement.