Your home may be more than a place to live in retirement. For some homeowners, it can also become a strategic financial resource—one that may help manage taxable income, protect investments during market downturns, and create greater flexibility around retirement withdrawals.
Harlan Accola, who leads the reverse mortgage team at Movement Mortgage, joined the show today to explain how a reverse mortgage—specifically a Home Equity Conversion Mortgage, or HECM—can fit into a thoughtful retirement income strategy.
A reverse mortgage is not right for everyone. But when used carefully as part of a broader financial plan, home equity may provide retirees with options they would not otherwise have.
Why Reverse Mortgage Proceeds Are Different From Income
One of the most common misconceptions about reverse mortgages is that homeowners sell or give up ownership of their homes. That is not the case. A reverse mortgage is a loan secured by the home, and the homeowner retains title as long as the requirements of the loan are met.
Because the money received through a reverse mortgage is generally considered loan proceeds rather than earned or investment income, it is not typically included as taxable income on a federal income tax return.
That distinction can be significant in retirement.
Many retirees rely on a combination of Social Security, pensions, traditional IRAs, and 401(k)s. Withdrawals from tax-deferred retirement accounts generally increase taxable income, potentially affecting tax brackets and other income-based thresholds.
Home equity can provide another source of cash. Instead of withdrawing every needed dollar from a traditional IRA or 401(k), a retiree may be able to strategically use home equity for a portion of living expenses. That could reduce the amount that must be withdrawn from taxable retirement accounts in a given year.
The goal is not simply to avoid taxes. It is to thoughtfully manage when and how taxable income is recognized.
Managing Retirement Withdrawals More Strategically
Taxes in retirement are often about timing.
Withdraw too much from a traditional retirement account in one year, and you may move into a higher tax bracket or cross other important income thresholds. Later in retirement, required minimum distributions can further limit how much control retirees have over taxable withdrawals.
Social Security also adds another consideration. Depending on a retiree’s income, up to 85% of Social Security benefits may be subject to federal income tax. That makes coordinating income sources especially important.
For some retirees, access to home equity may allow them to take smaller taxable distributions during certain years while drawing on a reverse mortgage for additional cash needs.
Meanwhile, money that remains invested has more opportunity to continue growing.
That does not mean borrowing against a home is always preferable to withdrawing from investments. Reverse mortgages have costs, interest accrues on the loan balance, and using home equity reduces the equity that may otherwise remain available later.
The question is whether strategically combining these resources could produce a better overall retirement outcome.
Creating Flexibility for Roth Conversions
Home equity may also play a role in Roth conversion planning.
A Roth conversion involves moving money from a traditional IRA or other eligible tax-deferred retirement account into a Roth IRA. The amount converted is generally taxable in the year of the conversion, but qualified Roth withdrawals in retirement are tax-free.
For some retirees, converting portions of traditional retirement accounts during lower-income years can make sense. The challenge is paying the resulting tax bill.
Suppose someone converts a significant amount
