Protect Your Retirement Savings from New Medicare Fees with a Reverse Mortgage

Kathleen Coxwell

February 10, 2016 • 5 minutes

*Tax-free income from a reverse mortgage can be a great way to cover new higher Medicare fees*

Earlier this year, Medicare introduced a new program framework that will make paying for certain coverage options more expensive in the future. Covering these new surcharges would normally have to come out of other income or by drawing down your investments. But, it doesn’t have to come out of pocket, or even out of your retirement savings for that matter. When used strategically, a reverse mortgage not only provides retired homeowners with extra tax-free cash flow during retirement, but it can also safeguard other investments in years when market turmoil produces negative returns. A reverse mortgage enables homeowners age 62 and older to borrow against their home equity. The most common reverse mortgages are known as Home Equity Conversion Mortgages (HECMs) that are insured by the Federal Housing Administration. The loan proceeds received from a reverse mortgage may be accessed in a variety of ways, including a single lump sum payment, monthly installments or a line of credit, which can be drawn upon at the borrower’s discretion. The amount of loan proceeds a borrower may be eligible to receive is based on their age, the age of their spouse (if applicable), interest rates and the appraised value of their home. While a reverse mortgage does not require borrowers to make monthly payments to a lender, as they would with a traditional “forward” mortgage, borrowers are still responsible for paying property taxes and homeowner’s insurance associated with their home. The loan proceeds obtained from a reverse mortgage can be used in any way the borrower sees fit. Many reverse mortgage borrowers have used their proceeds to pay for home renovations, paying down credit card debt, funding vacations, as well as covering medical bills and other health care expenses, including Medicare fees.

New Medicare surcharges

This year, some retirees will find they are required to pay higher Medicare premiums if their retirement income exceeds a certain level. That’s because earlier this year a new law changed the sliding scale used by Social Security to determine Medicare surcharges. This means Medicare beneficiaries may pay more for certain coverage options in the future, including Medicare Part B, which covers doctor visits and outpatient services, and Medicare Part D, which covers prescription drug costs. The new law from the Centers for Medicare & Medicaid Services (CMS) lowers the top three modified adjusted gross income (MAGI) tier thresholds, which means more beneficiaries will be exposed to paying more for the same level of benefits, according to Katy Votava, Ph.D., a Registered Nurse and President of Goodcare.com, a consulting service that works with financial advisers and consumers on health care coverage. The surcharges, officially known as the income-related monthly adjustment amount (IRMAA), create higher out-of-pocket Medicare costs for beneficiaries without providing any additional coverage benefits, Kotava wrote in a recent Investment News article.

“People will spend more out of their own pockets if they are even $1 into the next higher MAGI bracket,” Kotava wrote. “Conversely, they can save money by being $1 down into the next lower MAGI.”

Last November, CMS announced that the base Medicare premium for most retirees would remain at the 2015 level of $104.90 per month. However, those who are newly enrolled in Medicare in 2016, and those retirees who have already enrolled in Medicare but aren’t collecting Social Security benefits, will both pay a higher Medicare premium of $121.80 per month in 2016. For example, Kotava notes that people whose 2014 income topped the $85,000 individual filer & $170,000 joint filter thresholds will pay even more in 2016. Luckily, there are several retirement income planning options retirees could consider to help them move down to a lower bracket, in turn helping them save their hard-earned dollars. One of those options: a reverse mortgage.

Leveraging reverse mortgages

Lately, more financial planners have begun to reconsider reverse mortgages and the effective role these loans can provide when used as part of a coordinated retirement income planning strategy. Much of the increasing attention is largely due to recent financial planning research, which has demonstrated how reverse mortgages can successfully prevent retirees from taking early withdrawals from their investment accounts like 401(k)s and IRAs, and instead leverage loan proceeds in years when such accounts experiences negative returns. If leveraged correctly, reverse mortgages can also help retirees stave off increases in Medicare fees. “The basic strategy is to structure retirement income to maximize cash-flow sources that will not be included in Medicare’s MAGI calculation,” writes Kotava. “The lower the MAGI bracket, the lower Medicare Parts B and D surcharges will be without reducing benefits. In fact, those costs can be eliminated in the lowest MAGI tier.” [MAGI is your Modified Adjusted Gross Income.] Because the loan proceeds from a reverse mortgage are tax-free, they are not included in the calculation of Medicare IRMAA surcharges.

Kotava urges financial planners to consider whether a reverse mortgage line of credit can be used to help clients supplement their taxable income distributions in order to prevent them from going over into a higher Medicare surcharge bracket.

Financial planners are increasingly interested in using a reverse mortgage, to help reduce a client’s taxes by reducing the amount they withdraw from qualified accounts, according to Tom Dickson, founder of Financial Experts Network, a firm that collaborates with financial planners on the use of HECMs in planning strategies. “For every $10,000 a client withdraws from an IRA, they could instead draw $7,500 from a HECM to provide equal purchasing power,” Dickson told Investment News. “Plus, that IRA money is left in place to grow. I see similar benefits from using a HECM to reduce MAGI as part of Medicare planning.” If you are interested in learning more about how a reverse mortgage might fit into your financial plans, or simply want to find out what size loan you qualify for, contact a reverse mortgage lender today.

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