Reverse Mortgages Could Help Retirees Avoid Medicare Surcharges

As healthcare costs continue to rise across America, financial advisors need to take particular notice of the ways in which these costs can affect their clients in retirement, and how such costs will translate into impact on a client’s retirement financing plans. One such way that healthcare costs are climbing centers on the Medicare program’s income-related monthly adjustment amount (IRMAA), which can impact retirement security.

This is according to a newly-published article at ThinkAdvisor, which recommends a few options that retirees can potentially explore so that their own IRMAA could be mitigated or avoided. One such option is a reverse mortgage, the article says.

“For many retirees, the equity in their personal residence represents a significant portion of their net worth,” the article reads. “This untapped equity can be accessed ‘tax-free’ with a variety of reverse mortgages.”

Notice that the article specifically placed quotation marks around the phrase “tax-free,” a potential acknowledgment of the fact that a loan’s proceeds cannot be taxed directly even though reverse mortgage clients must continue paying associated taxes, homeowners’ insurance and some other associated fees to keep his or her loan in good standing.

Using a reverse mortgage to supplement cash flow in retirement can have a direct benefit on Medicare recipients looking to mitigate the effects that IRMAA can have on a retirement portfolio, the article says.

“This not only helps avoid the IRMAA surcharge trap but can avoid what is popularly referred to as ‘bracket creep,’” the article says. “If you can avoid moving into higher marginal tax brackets and avoid IRMAA surcharges through the use of a reverse mortgage, it might be worth considering. However, reverse mortgages are complex instruments that must be carefully researched before implementing.”

Other potential methods a retiree can use to mitigate the impact of IRMAA include not assuming that nonqualified accounts should be used first in a liquidation order strategy; the consideration of Roth conversions; avoiding a propensity to over-save in pretax accounts; and taking tax-free cash values from a life insurance policy.

Like the reverse mortgage recommendation, however, the life insurance recommendation also comes with caveats that advisors and their clients should be aware of, the article says.

“Cash values in certain life insurance policies also can be distributed as tax-free income and help clients avoid IRMAA surcharges,” it says. “Again, advisors must carefully examine their clients’ life insurance policies, as not all qualify. With some, there is a risk of the policy lapsing, which would create a very unfavorable tax consequence called ‘phantom income.’”

Read the article at ThinkAdvisor.

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