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Your Questions, Answered

(posted: May 11th, 2017)

Straight Answer on Reverse Mortgages

Q: Are payments from a reverse mortgage taxable?

A: No. A reverse mortgage is a way of tapping into the equity in your home. Instead of borrowing money from a bank to buy a home, the bank makes payments to you based on the home's value. Because this is a loan that eventually must be repaid, there's no tax due on the payments you receive. For some taxpayers who own their homes outright and need money for retirement, a reverse mortgage might be a viable alternative. But they often include relatively high fees. If you move out or die, the reverse mortgage comes due, and the home may have to be sold by your heirs to pay it off. Use this technique with caution and investigate other funding methods.

Age Restraints on Required Minimum Distributions (RMDs)

Q: I'm 70 and have four grandchildren who range from 3 to 10 years of age. Can I reduce my RMDs by naming them beneficiaries?

A: Yes, within limits. Generally, you must begin taking required minimum distributions (RMDs) after age 70 1/2, based on the joint life expectancies of you and the other beneficiaries. So naming your grandchildren as beneficiaries (instead of older beneficiaries) will reduce your annual distributions, but maybe not as much as you think. Under the “incidental benefit rule,” the beneficiary is treated as being no more than 10 years younger than you. Thus, the 3-year-old, the youngest beneficiary, is treated like a 60-year-old.


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