Archive for August, 2012

Is a Reverse Mortgage Right for Most Seniors?

Posted on: August 20th, 2012 by Lawrence A. Friedman

Reverse mortgages often are marketed as a way for seniors to get extra cash.  While they can be a godsend to some, they also come with negatives.  Reverse mortgages are available only to homeowners age 62 or above with significant home equity.   Thus, a senior isn’t likely to qualify for a reverse mortgage if the home already is subject to substantial mortgage debt.   On the other hand, a valuable home with little or no mortgage debt can be a good candidate for a reverse mortgage.

To take out a reverse mortgage, a senior homeowner applies for a loan and if approved proceeds to a loan closing.  The senior can choose a reverse mortgage that provides a lump sum, income stream, or credit line, which the senior can spend as he chooses, but someday the senior or his/her heirs will have to pay the piper.  No payments are due on a reverse mortgage while it remains the borrower’s home but when the senior dies or moves out, the loan comes due.

Reverse mortgages come with drawbacks.  Set up costs can be substantial.  With the borrower paying origination fees, mortgage insurance, title insurance, appraisal fees, attorney fees and other costs, a reverse mortgage can be an expensive way to obtain cash.  A reverse mortgage incurs typical mortgage costs like interest, but the no payments are due until the homeonwer dies or otherwise vacates the home.  Thus, a reverse mortgage essentially sells some of a senior homeowner’s equity for an upfront cash agent.  If the homeowner lives in the home for life, the homeowner never need pay against the reverse mortgage, but at the homeowner’s death, the home must be sold to repay the reverse mortgage principal plus interest and other costs.

Is a reverse mortgage the panacea that some ads portray?  Obviously, not, but it can be a good option for older homeowners who need cash but don’t want to have to repay debt while still living in the home.  Because a reverse mortgage is a legal arrangement involving most folks’ primary asset, you should consult an elder law attorney before entering into a reverse mortgage.

Further information on finances, elder law, funding long term care without going broke and other subjects is available throughout To subscribe to our frequent blog updates, click on “Subscribe to this Blog” in the Meta box to the left and then click on “subscribe to this feed.”

IRS Cracks Down on IRAs

Posted on: August 6th, 2012 by Lawrence A. Friedman

While IRAs can be a great way to build up savings tax deferred, they also are fraught with traps for the unwary.  Penalties apply when an individual contributes to an IRA more than the Internal Revenue Code permits or fails to take the required minimum distribution.  IRS is turning its attention to IRAs that are out of compliance and should be paying penalties.

IRAs vary between traditional, Roth, and those funded with individual contributions vs. IRAs that contain roll overs of tax qualified employee retirement plan distributions.  Each type of IRA is subject to its own rules.

The Internal Revenue Code caps maximum contributions to IRAs.  For instance, this year the maximum contribution (other than roll over contributions) is $6,000.  However, depending on income, age, and marital status, your contribution limit could be less.  In addition, while all  IRA contributions were tax deductible at one time, they are not anymore.  If you or your spouse participates in a tax qualified retirement plan through work, you may not deduct all or some of your IRA contributions unless total income is no more than moderate.  In 2012, at least some IRA contributions are not deductible when income exceeds $58,000 for single taxpayers and $92,000 for married people who file jointly, but only $10,000 for married individuals who file separately.

Where an IRA contribution will not be deductible, savings can be increased by employing a Roth rather than traditional IRA.  Earnings on Roth IRAs aren’t taxable.  However, you can contribute to a Roth IRA only if your income is within statutory limits.  Different rules apply to conversions of traditional IRAs to Roth IRAs and roll overs of qualified plans to traditional and Roth IRAs.

If you contribute to an IRA more than is allowed, you may be subject to a penalty of 6% for each year the excess contribution stays in the IRA.  However, if you fail to take minimum required distributions from an IRA, a 50% penalty can apply to the amount you should have withdrawn.  Determination of required minimum distributions is complex and since the stakes are so high, it can be worth the cost for professional advice.

As this website provides general information and isn’t tailored to your particular situation, it doesn’t constitute legal advice and may not take into account rules and exceptions that affect you. Although updated from time to time, this website may not take account of recent legal developments or differences in laws from state to state. For safety sake, obtain individual legal advice before you act! You assume all risk of acting on information contained in this website. This website doesn’t constitute legal advice, and no attorney-client relationship exists unless FriedmanLaw and you execute a written engagement agreement. Please contact us at 908-704-1900 to discuss engaging FriedmanLaw to help resolve your legal concerns.
Homepage photo: Cows grazing at Meadowbrook Farm, Bernardsville, NJ by Siddharth Mallya. October 23, 2012.
Interior photo: Somerset hills pastoral scene by Lawrence Friedman.