Episode: 03-08-2022 | Reverse Mortgages, Gifting Rules, And IRAs

Hosted by Kevin J. Zywna, CFP® and Allison K. Dubreuil, CFP® Dollars & Common Sense · Reverse Mortgages, Gifting Rules, Roth Conversions & more IRA Basics Allison Dubreuil, Wealthway Financial: We’re going to talk all things IRA. As we’re approaching the tax filing deadline, one of the other deadlines that coincide with tax filing is […]

Hosted by Kevin J. Zywna, CFP® and Allison K. Dubreuil, CFP®


IRA Basics

Allison Dubreuil, Wealthway Financial: We’re going to talk all things IRA. As we’re approaching the tax filing deadline, one of the other deadlines that coincide with tax filing is the deadline to make your contributions to your Traditional and Roth IRAs. We thought what better time to address IRAs and talk about things you want to make sure you know, so that you don’t end up messing up some of the rules. There are a lot of rules around who can contribute, how much you can contribute, when you have to take money out, when you when can you take money out, and what kind of penalties and taxes are involved. A lot of pitfalls to avoid.

Kevin Zywna, Wealthway Financial: Yep, we’re going go over the IRA basics today. You get a feel for how they work and can take full advantage of them if they are appropriate for you. It is one of the few tax strategies that you can use after the calendar year has finished. Like Allison mentioned, if you’re eligible, you can make IRA contributions that count for tax year 2021, up until tax filing date of 2022. This year it’s April 18 because there’s a holiday in DC.

Reverse Mortgage Considerations

Kevin Zywna, Wealthway Financial: Alright, before we jump into the topics on IRA basics, we have a few callers on the line. Right now we’ll go out to Chesapeake and speak with Jim. Good evening, Jim. You’re on Dollars & Common Sense. Thanks for the call.

Caller:  Thank you. Great show. I always like to listen to you folks. I have a question about reverse mortgages. I’m 69 still have about $230,000 left on my mortgage. The house, from what the city is assessing, is about $376,000. So there’s about maybe $100K in equity. What sort of history does reverse mortgage have? I mean, I always get negative opinions on it.

Kevin Zywna, Wealthway Financial: Yeah, good question, Jim. We happen to think (broadly speaking), that nowadays, the type of reverse mortgages that they offer are a great financial planning tool. And they come in a variety of shapes and sizes, in order to fit your particular needs. They can very much represent a similar conventional first mortgage, or they can act like a home equity line of credit, that also grows with the equity in your house. So in general, we’re in favor, we’ll give you a little bit more of some of the details.

Allison Dubreuil, Wealthway Financial: I would say that in the past, reverse mortgages had a bad reputation, because there were some predatory lending practices.

Kevin Zywna, Wealthway Financial:  Deservedly so. The early ones were not good

Allison Dubreuil, Wealthway Financial: Those were largely eliminated during the Frank Dodd legislation that cleaned up the rules and regulations around reverse mortgages. So they are now very much standardized, and advantageous for the right person. And like Kevin was saying, we like to use them as proactive planning tools. They’re no longer just the last resort. “I have no funds left” type of planning tool. It can be a very powerful, proactive planning tool in retirement for the right person. Tell me Jim, do you see yourself staying in your home for the foreseeable future?

Caller:  Yes.

Allison Dubreuil, Wealthway Financial: And are you married?

Caller:  Yes.

Allison Dubreuil, Wealthway Financial:  How old is your spouse?

Caller:  She’ll be 65 here in a couple of days. 65.

Allison Dubreuil, Wealthway Financial:  Okay.

Caller:  I’m 69.

Allison Dubreuil, Wealthway Financial: What is the interest rate on your current mortgage?

Caller:  3.485%.

Allison Dubreuil, Wealthway Financial:  Okay. And what about reverse mortgages is piquing your interest? Is there something you’re trying to accomplish with that?

Caller: Well, if my wife gets into a retirement situation, having enough monthly income, to handle the existing mortgage. See, I was stupid. I did all these, you know, equity loans and refinancing. And, you know, I bought this house for $125,000 in 1993. And I should be paying it off now.

Kevin Zywna, Wealthway Financial: Well, no, you don’t have to feel bad about that. There is no law that says you have to have your house paid off at retirement or at your death or at any point in time. What you do have to do is make your next monthly mortgage payment. That that much you do have to do. But taking and or maintaining a mortgage on your house at a low interest rate. And I would classify your 3.485% as a good, historically low interest rate. That’s essentially good debt. If you use the extra proceeds from the lower mortgage payment to build up the rest of your financial house, then there’s nothing wrong with carrying that mortgage. You don’t have to feel bad about that. But you do raise a good question. And that is: now that I built some equity into my property, you can’t eat your house, so how can I liquefy the equity in a hard asset like real estate? Well a reverse mortgage is a great tool to do that.

Allison Dubreuil, Wealthway Financial: Yes, so you can use a reverse mortgage to essentially pay off a conventional mortgage. And one of the benefits of a reverse mortgage is that you don’t have to make payments like you do on your conventional mortgage. One of the limits though, is the amount of equity that you can access for a reverse mortgage. You typically cannot get more than 50 to 60% of the home’s value in a reverse mortgage. So that might pose a planning challenge for you at this point. It would probably be wise to come up with a cash flow plan to see if you’d be able to continue making your conventional mortgage payments once your wife retires.

Kevin Zywna, Wealthway Financial:   Or you could use that reverse mortgage to essentially pay off the first – or get close.

Allison Dubreuil, Wealthway Financial: It can. It’s can be the only lien on the property. So I don’t think there’s enough equity based on the value you’ve told me.

Kevin Zywna, Wealthway Financial:  You’ve got to get it down to about 225 on the mortgage balance. You’re close. Then you could essentially convert that first mortgage into a reverse mortgage. Then turn off your mortgage payment. So whatever you’re making your mortgage payment at, $1,200 or $1,500. Now, you still have to pay taxes and insurance on your property. But the principal and interest you do not have to make payments on and that frees up monthly cash flow that can be helpful as well.

Caller:  Sounds good. Sounds pretty good.

Allison Dubreuil, Wealthway Financial:  Yeah, it’s something that you could work towards. If you get that mortgage down a little bit. As long as you plan to stay in the home for the foreseeable future. It doesn’t have to be repaid until you and your spouse permanently move out of the home. So that’s why I asked if you plan to stay there then it could be a good tool. If you saw yourself moving in the future then it may not make sense.

Caller:  Okay, well, I appreciate this information. I’m going to give you guys a ring, okay.

Kevin Zywna, Wealthway Financial:  Okay, Jim, thanks for the call. We appreciate it. There are a lot of providers out there that do reverse mortgages. We don’t do reverse mortgages, but we do advise on them and we do recommend them if the right people at the right time.

Best Investment Options for a Short-Term Window

Kevin Zywna, Wealthway Financial:  We’re going to stay in Tidewater region and speak with Jeff. Good evening, Jeff, you’re on Dollars & Common Sense.

Caller: Good evening. Thank you for taking my call.

Kevin Zywna, Wealthway Financial: You’re welcome.

Caller:  My question is, I have some money for my son that I can set aside for roughly a three-year period. I would like to get your suggestions on what would be the best suggestions you have or top three as to what you would recommend I do.

Kevin Zywna, Wealthway Financial: So you have a certain sum of money that you have a dedicated use for within three years, correct?

Caller: Yeah, I’ll clarify that I am saving this money. I want to set it aside. And then after the three years, I want to be able to give it to him. But I don’t want to just let it sit in the bank.

Kevin Zywna, Wealthway Financial: Okay you want to give it to your son in three years. All right. Do you have a set dollar amount that you’re trying to give to him? Or are you using this opportunity to teach him about savings and investing?

Caller:  No, lesson here. I don’t want to just let it sit in the bank. I want to hold on to it. You’ve asked about the sum. It’s going to be roughly, it’s not huge, but $10,000?

Allison Dubreuil, Wealthway Financial:  How old is your son?

Caller: He’s in his 20s.

Allison Dubreuil, Wealthway Financial:  Okay, does he know about this?

Caller: No, no.

Kevin Zywna, Wealthway Financial: Okay it’s going to be a nice surprise.

Caller: Yeah.

Kevin Zywna, Wealthway Financial: All right, well, that’s kind of a trickier one, three years. So I hear what you’re saying about money in the bank accounts. You’re not earning any interest. That is true. We are still at rock bottom rates, at least bank savings rates. You might be lucky to get 0.1%, or I guess some of the online banks, you might get 0.5%. But on $10,000, we’re not talking much in terms of material that’s about 50 bucks, you know, a year. The next alternative is take an opportunity to invest it into variable type investments that have the opportunity to grow more. That usually means stocks or bonds. But three years is right on the edge of my comfort zone for short term money.

The risk is if you invest it today, the probability would be that you’re going to have more money three years into the future. But the risk that you could be less than what you invest today is not zero. And so I’m a little bit hesitant to say that, well, you should get yourself a good diversified no load mutual fund from Vanguard or, or something like that. I mean, that is an option. But if you have a hard dollar amount that you really want to give them, then you’re getting close to the area where you might just have to consider just keeping it close to the bank.

And I don’t like the idea of bonds. You know, with rising interest rates, that’s going to put downward pressure on bonds. I think there’s more risk in you having less money three years in the future, by investing in bonds than you do in stocks. So throw the bonds right out the window. And on the fence are the equities. What do you think?

Allison Dubreuil, Wealthway Financial: Yes, I think it depends on what the goal is. If you’re just trying to give him a cash gift that he can do whatever he wants with at the end of three years, or if you are trying to start him on a savings path, then there may be a case to investing it and transferring investments to him.

Kevin Zywna, Wealthway Financial: Right, right. But doesn’t sound like that’s the case here, Jeff, is it?

Caller: Well, that’s actually a really good suggestion, because you are confirming some of my, my original thoughts. Because it is a limited time, and it’s not a great deal of money, the investment ideas is really actually a pretty good one because that gives him the option. He can either continue running with it, or he can cash it out. And I was going to give him the cash anyway. It’s pretty good suggestion, and I really appreciate your time tonight.

Kevin Zywna, Wealthway Financial: Yeah. Okay. Thanks for the call. Jeff. We appreciate it. That is a great idea, Allison. If he doesn’t have a hard dollar amount, you can transfer shares of a stock or a mutual fund to another owner. And then no matter what the value is, at that point in time, if the cash needs are imminent, like his son is not going to use it for say a down payment on a house in three years or it’s more for general life starting – getting off the ground purposes, then I would feel better about going in the direction of investments in equities and stocks. Definitely not individual stocks. But I would say a good diversified mutual fund so something like Vanguard Total Market, or the Vanguard World Fund, or an ETF – a broadly based index fund. It doesn’t have to be Vanguard. Schwab has them. Fidelity has them. Wherever you might have a brokerage account, most of those places have low cost, generic index funds. There’s nothing wrong with that. They do a great job for what they are. And I’d much rather be investing money now, then say, two months ago. So you’re going to get a little bit more of a discount today than you did two months ago.

How to Distribute Money Left to Siblings From a Joint Account

Kevin Zywna, Wealthway Financial:  We’re going to go to Norfolk and speak with Ty, do I have the pronunciation correct? Ty?

Caller: Yes, you do. Okay, thanks.

Kevin Zywna, Wealthway Financial: How can we help you?

Caller:  Hey, good evening, my brothers and I are in the process of settling my late father’s estate. And while I think we’re on track, and everything is pretty much in order, there’s one account in which my wife was listed as joint. We want to separate that and pay it out to my brother’s. My understanding is that she can do a one-time gift to them up to $16,000 without any tax ramifications.

Allison Dubreuil, Wealthway Financial: Well, yes, but first let me just make sure we get that straight because that’s a nuanced question. So your wife owned an account with your your father?

Caller: Yes, she was joint on the account.

Allison Dubreuil, Wealthway Financial:  Okay. And what kind of an account was it? Was it a bank account, an investment account, a retirement account?

Caller:  It was just at a local credit union. I think a savings or maybe a checking account. It was just so she could handle things in the event of an emergency or cover expenses.

Allison Dubreuil, Wealthway Financial: Yeah. Okay. Yeah. Well, I will tell you that actually, you can gift up to $12 million to someone without tax implications. That is the technical answer that there really, there really aren’t tax implications for gifting up to $12,060,000. But you are not wrong that there is this $16,000 per year gifting amount that allows you to gift without any sort of reporting requirements. So if you gift more than $16,000 per person, so she could give $16,000 to multiple people. But if you get more than that, then you just have to do an extra filing with your tax return. But it does not make it taxable to you or to the recipient of the gift.

Kevin Zywna, Wealthway Financial: But there is some administration involved in going over a gift of $16,000 in one calendar year.

Caller: Okay, so if I kept it at that amount, or slightly lower, I shouldn’t have any issues.

Kevin Zywna, Wealthway Financial: Right, then you don’t have to do anything at all, except enjoy the gift that was given to you.

Allison Dubreuil, Wealthway Financial: No reporting, and no tax.

Caller: Okay, now will the institution be able to simply wire it to another account of that person’s choosing? Or do they generally prefer to cut a check?

Allison Dubreuil, Wealthway Financial: Well, is the account now in her name only?

Caller: It’s now in her name only. Yes.

Allison Dubreuil, Wealthway Financial: Okay. So she could just write a check. Or she could set up an electronic transfer. I don’t know that you need to pay for an extra wire. But that that would be an option as well.

Caller: Okay, great. Thank you very much.

Traditional IRAs, Roth IRAs and Taxation

Kevin Zywna, Wealthway Financial: Thanks for the call. We appreciate it. Going to Hampton to speak with Dan. Good evening, Dan. You’re on Dollars & Common Sense.

Caller: Good evening. Thank you both for providing this service. It’s fabulous. I’m going to be 67 in September, and I have a certain number of conventional IRAs. I’m wondering, should I convert those into a Roth IRA, even at my age, knowing that taxes are going to go up in the future?

Allison Dubreuil, Wealthway Financial: Well, let’s see. Dan, are you still working?

Caller: No. I’m retired.

Allison Dubreuil, Wealthway Financial: Retired. Okay. Do you have any retirement income?

Caller: I have a lot of investment income. I have income properties.

Allison Dubreuil, Wealthway Financial: So like rental properties?

Caller: Yes. So I don’t need to touch any of my savings.

Kevin Zywna, Wealthway Financial: Okay. And spouse? How old?

Caller: She’s 65. And she’s retired as well.

Kevin Zywna, Wealthway Financial:  Okay. Not earning any income.

Allison Dubreuil, Wealthway Financial: Okay. And do you have kids?

Caller: Yes, we have three children that are grown.

Allison Dubreuil, Wealthway Financial: Do you have any strong legacy wishes? Do you feel like you want to try to leave something to them at the end?

Caller: I’ve already have a certain estate plan done where each child’s going to get a certain number of houses.

Allison Dubreuil, Wealthway Financial: Okay. Oh houses. Okay.

Caller:  Which will give them income? So we’ll give them both. We’ll will them any savings that’s left, but also we’re going to leave them the property so that they can continue making money with them.

Allison Dubreuil, Wealthway Financial: Okay, well, generally speaking, I will say that we have done extensive analysis on Roth conversions, and there is not a simple yes or no answer. So typically, you want to convert if you are in a very low tax bracket. So you pay your taxes when you’re in a low tax bracket in hopes of lowering your taxable income in retirement, and reducing the amount of required minimum distributions that would have to come out of your pre-tax, IRAs, in retirement. So we have found that it typically doesn’t make sense, unless you have upwards of $2 to $3 million dollars, usually in a pre tax IRA.

Caller:  I don’t have that.

Allison Dubreuil, Wealthway Financial: Okay. So then it may not be advantageous. The other factors are, how much are you going to withdraw from your IRA over the years? It sounds like you don’t need to make significant withdrawals. Then the third factor is well, how do you feel about leaving a taxable asset to your heirs versus a tax free asset. Because if you leave it in the tax protected IRA wrapper, and it passes to your children, it will be taxed at their tax rate. Or if you pay the tax now, and then they inherit a Roth IRA, it will be tax-free to them.

Caller: I would rather give them a Roth.

Allison Dubreuil, Wealthway Financial: Okay, so that is one reason that people may decide to convert assets from an IRA to a Roth IRA. We find that it takes a very long time to break even because you’re pre-paying your taxes now at a higher rate. So It doesn’t sound like it’s something you’d be doing for you or your wife, but maybe something you’d be doing for an estate tax or estate planning reason.

Caller: Yes, more of that purpose. Well, how long is the payback?

Allison Dubreuil, Wealthway Financial: It really depends on your personal situation.  You’ll be in your late 80s, or 90s, probably when you would break even. But that would depend on a lot of factors.

Kevin Zywna, Wealthway Financial: If tax rates do increase, then that does make the break even a little bit sooner than that. But I’d be careful about trying to play that game too much. The change in tax rates is exceptionally fickle, because tax rates are determined by Congress. And I know that there’s certain grounds of belief that the tax rates are not going to be any lower than they are now and probably are going to be higher. But you know, we could see these rates for a long time. Or any changes might just be minuscule, or, or very tiny, incremental. And so trying to play the tax game, I’d be careful about doing that. Because it might not pan out for that reason alone.

Allison Dubreuil, Wealthway Financial: Actually, we’ve done a lot of research on that and stress tested it. It has to be a significant increase in tax rates in the future to really move the needle.

Caller:  Alright, well, thank you so much for the advice, and I understand completely what you said. I really appreciate it very, very much.

Kevin Zywna, Wealthway Financial: All right, Dan, thanks for the call. We appreciate it.

Importance of Customized Financial Planning

Allison Dubreuil, Wealthway Financial: Well, we had a really good call from Dan before the last break that I just thought it deserved a little more conversation because Roth IRAs are an example of a strategy that you hear about all the time. They sound really good in theory. But we have found in practice that it very much depends on many different personal circumstances and factors as to whether or not it makes sense. I think that can be said about a number of financial planning strategies where it’s difficult in a format like this to say “yes, you should do it” or “no, you shouldn’t do it.” It’s difficult to just go on an online calculator and plug it in and say “yes, convert” or “no, don’t convert” or “yes, claim Social Security.” “No, don’t claim.”  It’s missing pieces because our lives are very complicated with so many different pieces to the puzzle. Just a word of caution to watch out for making decisions, big decisions like that, in a vacuum without looking at all of the variables.

Kevin Zywna, Wealthway Financial: Yeah, if there’s one thing that’s true about personal finance is that one size does not fit all. A lot depends on your individual family circumstances. Are you married? How much older or younger is your spouse than you? Does your spouse work? Do you work? Your health. Your kids. How old are your kids? What are your plans for your kids? Is their college involved? Is there not? Are you going to work later on in life until your late 70s? Or do you want to get out of there right away at 62? Or 60? Or as soon as you possibly can? All those nuanced personal factors play into the decision making to a lot of the technical financial analysis. And so while there are some rules of thumb, and there are some general guidelines, you want to either give yourself some introspection on what works best for you. Or align yourself with a good, competent financial advisor who can help guide you through these questions. So you make the best decision for you.

Allison Dubreuil, Wealthway Financial: Right, we always say it’s an art and a science. So there is math and science around it. Certainly there’s theory, there’s strategy. There are some absolutes. Very few absolutes, though?

Kevin Zywna, Wealthway Financial:  There’s certainly a fair amount of technical knowledge. We boil our investment management down to a rate of return. So there’s a lot of math around that. And sophisticated software to get performance down to understandable global rate of return. That’s absolute there. That number is what the number is. But now, what do you do? Or what does it mean? Yeah, what does it mean that you earned 12% on your investments last year?  Or you’ve been averaging, say, 10%, on your investments over the last five to 10 years? What does it mean? Are they growing fast enough? Does that mean you can retire at your desired age that you that you wanted to? Does it mean that you can now purchase the vacation home? Or that you can pay cash for your kids college, if that’s important to you? Although the numbers are our absolute, but what they mean and what you do about them, that’s very personal.

Allison Dubreuil, Wealthway Financial:  And so if you are hearing buzz about a strategy, or a must do. Just know that there are very few one-size-fits-all strategies. And in fact, when we have been diving deeper into Roth conversion strategies, we have not found it to be advantageous for most of our clients, very few. In very select circumstances, it makes sense when you factor in all of their financial aspects.

Another one that is surprising is Social Security. If you read all of our industry literature, it’s “delay, maximize the benefit, wait till 70, get that guaranteed 8% per year increase, and you will be better off long term.” Well, it all depends on cash flow needs. When do you actually need the money? Or if you don’t really ever need the money, then it’s just, when do you want to enjoy the money? It’s not necessarily about the numbers at that point.

Kevin Zywna, Wealthway Financial: You aren’t trying to, at that point, maximize every last security dollar, you’re trying to get the money that’s available to you now in order to maximize your quality of life now. So sometimes, people who could afford to delay out to age 70 choose, with our guidance to take it sooner than that. Which just means they can draw less from their savings or draw less from their investment portfolio and allow that to continue to build long-term and then they have the money to enjoy now, while they’re relatively young and while they’re relatively healthy. Because we can tell you from professional experience that most people, by the time they reach their mid to late 80s and their 90s, while they might have all the financial resources, they need to do whatever they want. They don’t always want to do a lot.

Allison Dubreuil, Wealthway Financial: They don’t want to do much.

Kevin Zywna, Wealthway Financial: Travel becomes more of a hassle. Yeah, and a burden, you know, with the flights and the delays and the baggage, and that’s my fear and all that stuff. People tend to not do as much later in life. And so therefore, they don’t need as much money. You can make the case that well, let me take what’s available to me now in my early to mid-60s, when I when I have that zest for life, and I’m willing to go places and travel and spend money and maybe gift it to my family when I can see the good that it does and the happiness that it brings. Like you said that while there’s numbers around social security claiming and if we know your date of death, we can, down to the penny, we can tell you exactly when to claim. But obviously no one knows those things. We, as financial advisors, are used to working in a futuristic probabilistic type of environment where the knowledge is not 100% certain. We have to wade into that uncertainty, and provide some structure for our clients to say, here’s what’s probably going to be the income/outcome. Here’s what most likely you’re going to see long term-from a savings or spending plan. But then we talk about reality and life and what worked for them where they are today, and then come to the ultimate decision.

Allison Dubreuil, Wealthway Financial: And even though we don’t know exactly what’s going to happen, laying the groundwork for that and doing comprehensive financial planning allows us to help our clients adjust more easily, more fluidly as things change and develop in their lives.

Kevin Zywna, Wealthway Financial: So I think the moral of the story here: we give as good advice as we can over the airwaves in a short amount of time we can with the limited information that we have. But just know that your individual mileage may vary. And it’s always great to have a full sit down with a competent, honest, ethical financial advisor.

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