I received an email the other day from a reverse mortgage broker in which he asked an interesting question. Since I have had a number of conversations with this broker in the past I knew that he was in fact looking for answers based on my financial planning experience rather than just trying to get me to justify a sale.

 

The question at first glance appears to be simple enough, “Should a reverse mortgage be pursued in this situation?” In reality to answer this question with some semblance of correctness we have to look at it from a number of different yet related perspectives. In other words, rather than a simple yes or no we had to make an objective assessment of a situation, taking into consideration all the different aspects and their comparative importance.

 

The reason I wanted to share this is because it is a real life situation that comes up on a regular basis. What makes it interesting to me is that I have had this same question posed to me a number of times by a number of different people in the reverse mortgage, investment planning and insurance fields; and more often than not they were look for the validation of a sales presentation.

 

So here is the question as it was written via email:

 

Jonathan, have you thought about the potential advantage of utilizing a reverse mortgage to pay taxes on a Roth IRA conversion?

 

Of course at first glance the simple answer is yes, but when giving advice, about someone else’s money at least, a little time should be given to thought. So I have thought about it, as a matter of fact I have thought about it, written about it and had numerous conversations with a lot of different people about the potential advantages. On the other hand I spent a lot more time thinking, talking and writing about all the disadvantageous.

 

Here is my actual replay:

The Roth question comes up a lot, and I almost never give the person asking the question the answer they are looking for.

A Roth conversion usually implies one if not both of the following:

(1) A significant tax liability will be generated. If this isn't the case why bother.
(2) The person considering the conversion is not going to need the funds for a minimum of five years. If this is the case why not just wait until they do need the money. Even if a person does have to start complying with RMDs there are numerous other options that would prove more beneficial than paying all the taxes up front. I am sure that there are cases where this would make since, but I have yet to see the situation or model where it does.

 

Thanks,
Jonathan

 

What you need to take into consideration is that the answer I gave is nothing more than my opinion. As such there is no doubt you can find any number of other people who will have opinions that will differ from mine.

 

The point I want to make here has nothing to do with my opinion of this particular question, what it has to do with is the reality, you as a reverse mortgage professional are faced with, when it comes to what people plan on doing with the money they generate from a reverse mortgage. In other words the real question is what, if anything, is your responsibility when it comes to how people use their own money?

 

The truth is that I have heard many different reasons for why people decide to do a reverse mortgage ranging from what I considered to be really well thought-out and smart reasons to some downright dumb ones. However, what I have to keep reminding myself is that whether a person’s reasoning makes sense to me or not is irrelevant, after all it is their money and my opinion is nothing more than that, my opinion.

 

On the other hand, if a reverse mortgage professional is involved in the decision process of a senior when it comes to whether or not they do a reverse mortgage that includes the opinion(s) and presentation(s) of one or more people in the insurance, investment or accounting fields we have ventured into a whole new arena filled with pitfalls and land-mines AKA liability and conflicts of interest.

 

Think about it from this point of view, the sale of one product or service depends on the sale of some other product or service either immediately, prior to, or just after the completion of one or the other. Could it be reasonable for some third party to construe that sales people involved in the two transactions benefited mutually from the success of the other?  

 

Granted that this case could be made on almost every reverse mortgage, but when the funds from the reverse mortgage end up being used to purchase an investment or insurance product it is almost a certainty that bells and whistles are going to be set off in at least one regulatory office.

 

When it comes to Roth IRAs you are dealing with federal laws written expressly to address a specific type of qualified account and the tax status of deferred taxes related to those accounts. This is one of those areas where it pays to abide by the old saying, “Fools rush in where angels fear to tread” or keep in mind what a securities attorney once told me, “my business depends on the acts of the rash and the inexperienced attempting things that wiser people avoid.”

    

The conversation of IRAs and other qualified accounts into Roth IRAs has been popular among some investment and insurance advisors since they came into existence as part of The Taxpayer Relief Act enacted in 1997. Unlike other qualified accounts where the tax deferral of the investment is fairly simple to follow, the Roth conversions require that the deferred taxes of the old account be addressed at the time of the implementation of the Roth. Satisfying the tax liability generated by converting an existing qualified account to a Roth is a serious issue that should not be taken lightly.

 

Food for thought:

If you are not a Lawyer, don’t give legal advice; if you are not an accountant, don’t give tax advice; if you are not a registered equities broker, don’t give securities advice; and if you’re not a licensed insurance agent, don’t give insurance advice.