To put together a possible
case, it takes a lot of assumptions
. To simplify this for this post, let's just compare two things: IRA distribution and a new mortgage.
the IRA is sizeable and the RMD is $25,000 per year - all taxable on top of social security income as well as any pension income. (Remember that if they DON'T take out the RMD, that the penalty is 50% of what they SHOULD have taken out.)
I'm ignoring the very real possibility of this distribution causing the person's social security to become included in the senior's taxable income. I'm also ignoring state income taxes too.
a 20% tax on the distribution: $25,000 x 20% = $5,000 tax liability.
that if there is a current mortgage has a payment of $2,083 ($25,000/year)... but the mortgage is in the later years... so the majority of this payment is principal payments with no tax benefits.
You refinance the mortgage so that the new payment matches the current payment
and that it is primarily interest only during the first few years (as a standard mortgage would be). However, the current tax rate would apply to these payments - let's just assume 20% to keep the math easy.
the same $25,000 interest payments (same payments as before) x 20% tax rate = $5,000 deduction.
$5,000 liability meets a $5,000 deduction and now it's a "wash". In effect, we've "cancelled out" the affect of the taxes on the IRA distribution for the current year.
How the mortgage can be structured could be a 10-year mortgage? Whatever it takes to keep the payment the same and maximize the tax advantages up front.
This is an overly simple method to compare, and it may not fit everyone's objectives. Those in their later years may feel quite uneasy about taking out a new mortgage, and they may even have trouble qualifying for it. I wouldn't do any kind of "Option-ARM" mortgage, nor would I necessarily recommend a cash-out refinance. It's just an idea or a concept that might fit... or it might not.
There are lots of assumptions
in this in order to make it "work"... but sometimes it could be worthwhile to explore it... to make an informed decision.
Of course, it would also take studying an amortization schedule on the new mortgage to determine how well the strategy will work long-term... against the RMDs of the IRA.
, in my example, we didn't "create new debt"... we only restructured it to give new advantages today.
Of course, that assumes that they are okay with extending the term of paying on a mortgage. Lots to consider. Because if they've only got 5 years or less... they might as well pay the taxes and enjoy the paid off home in 5 years.
But if they have a longer-term mortgage... it can make all the sense in the world.
It all "depends" on the facts in the case.