How Reverse Mortgage Loans Can Support Roth IRA Conversions

Financial advisors often face the same challenge with clients: they see the long-term benefits of a Roth IRA conversion but hesitate when it comes to paying the tax bill. Using retirement assets to cover conversion taxes can create ripple effects - from triggering higher taxable income to forcing sales during down markets.

There is another way to create liquidity: the reverse mortgage loan. While often misunderstood, this tool can give clients age 62 and older more flexibility when planning conversions and managing their long-term tax exposure.

Why Clients Consider Roth IRA Conversions

Roth conversions can be attractive for clients who want to: 

• Hedge against future tax increases by paying taxes now at known rates. 

• Leave tax-advantaged assets to heirs through Roth IRAs. 

• Reduce the impact of Required Minimum Distributions (RMDs) later in retirement. 

• Gain more control over how and when taxable income appears on their returns.

The sticking point: paying the conversion tax in a way that doesn’t drain retirement accounts or jeopardize long-term plans.

Where a Reverse Mortgage Loan Fits

The FHA-insured Home Equity Conversion Mortgage (HECM) allows homeowners age 62+ to tap into a portion of their home equity without monthly mortgage payments. Proceeds are considered loan advances - not taxable income. They can be received as a lump sum, monthly payments, or a line of credit.

For Roth conversions, reverse mortgage loans can provide:

1. Liquidity for Tax Payments

Clients may use reverse mortgage loan proceeds to pay the tax due on a Roth conversion instead of liquidating investments. This can help keep portfolios intact and positioned for market recovery.

2. Bracket Management Flexibility

By creating access to cash flow, advisors can help clients spread conversions across multiple years - filling lower tax brackets strategically and avoiding unintended bracket creep.

3. Protection of Other Income Sources

Clients can pay the tax bill without pulling from IRAs, pensions, or taxable accounts that support everyday living.

4. Legacy Planning Options

For some clients, using home equity to support Roth conversions may allow more assets to be repositioned into Roth accounts - where qualified withdrawals are tax-free for both the client and their heirs.

Case Example

Consider a 68-year-old couple with $1.2M in traditional IRAs and a $400K home that is free and clear. They want to convert $100K annually into a Roth IRA.

Instead of selling investments in a volatile market, they establish a reverse mortgage loan line of credit and draw $40K to cover the tax liability on year one’s conversion. Their retirement accounts remain intact, their Roth balance begins compounding taxfree, and they gain more control over when and how they take taxable income in future years.

Key Points for Advisors 

• Reverse mortgage loans may be a planning tool, not just a last-resort option. 

• Proceeds are not considered taxable income, which makes them useful when addressing Roth conversion tax obligations. 

• Advisors can differentiate themselves by helping clients balance home equity, investment portfolios, and tax strategy.

Important Considerations of the Reverse Mortgage Loan 

• Borrowers must continue to pay property taxes, homeowners insurance, and maintain the home. 

• A reverse mortgage loan is typically repaid when the borrower no longer lives in the home as their primary residence. 

• As with any strategy, suitability depends on the client’s full financial picture. Advisors should work closely with licensed reverse mortgage loan specialists and tax professionals before implementation.

Bottom line: Pairing Roth IRA conversions with reverse mortgage loans can give clients more control, flexibility, and confidence in retirement while preserving their other income sources.