Is reverse mortgage income taxable?
Q: I’m planning to get a reverse mortgage on my home. Will I have to pay income taxes on the money I get?
A: No. The payments you get from a reverse mortgage are treated as nontaxable loan proceeds, not income. Also, you can’t deduct the interest you eventually pay because you’re not using the proceeds to buy, build or substantially improve the home securing the loan.
Q: I’ve had a Roth IRA since 2008. I just opened and funded a second Roth IRA. Do I have to wait five years to take a tax-free payout from the second Roth? A:
No. The five-year rule determines whether payouts of earnings are tax-free. Generally speaking, distributions of earnings from Roth IRAs are tax-free if the owner is at least age 59 ½ at the time of the withdrawal and at least five tax years have passed since the owner first made a contribution into any Roth IRA.
The five-year clock starts the first time money is deposited into any Roth IRA, through either a contribution or a conversion from a traditional IRA. The clock does not restart for later Roth pay-ins or for new Roth IRA accounts that are opened. Because you funded your first Roth in 2008, you needn’t wait five years to take money from the second Roth for the earnings to be tax-free, provided you are at least 59 ½.
Note that it’s only the Roth earnings that the five-year rule applies to. Your Roth contributions can be withdrawn tax-free at any time. But keep in mind that you would owe the 10% early distribution penalty if you’re younger than 59 ½.
Q: I’m nearly retired but struggling to pay off education loans. If I fall seriously behind on loan payments, can that affect my Social Security benefits? A:
Student loan borrowers who are in default — including parents who took out PLUS loans for their children — may see up to 15% of their benefits garnished by the federal government. Retirees must be left with at least $750 a month in benefits, which means that some borrowers will have less than 15% of their benefits withheld, said Mark Kantrowitz, author of “How to Appeal for More College Financial Aid.”
As more individuals with large student loan debts approach retirement, the number of retirees facing a reduction in their benefits will likely rise. A 2017 report by the Consumer Financial Protection Bureau found that borrowers older than 60 represented the fastest-growing segment of the student loan market. The report also found that the majority of those older borrowers had taken out loans to finance their children’s education.