Uncover the tax tips and tricks of a reverse mortgage to help clients achieve their pension potential.
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For many advisors a reverse home mortgage is often been considered a last-ditch attempt to maintain a pension promise. But few understand that a reverse mortgage can be used as a standard planning tool to advance total estate wealth.
Key to unlocking the planning potential in a reverse mortgage is to understand the unique tax advantages that apply to plans like the HomEquity Bank Income Advantage plan.
Revenue Canada rules are clear: When it comes to reverse mortgages resulting cash flows are not taxable since these funds are equivalent to loan advances from a traditional mortgage. This simple, but powerful detail means reverse mortgages can be extremely useful as a general planning tool.
Here is how to do it: Take tax-efficient money from a client’s home, take less from their taxable investments and pensions. By doing so the advisor optimizes the de-accumulation of investment assets. This allows clients to better control how much tax they pay while shrinking long-term tax liability. By avoiding withdrawals from the investment portfolio a planner can more effectively manage a client’s estate. The advisor increases tax planning flexibility, controls tax brackets, avoids claw backs, but, more importantly gets money out of taxable scenarios at the lowest tax rate possible.
Advisors can also allocate sums of money to beneficiaries on a more tax-efficient basis. "Controlling the amount of tax you pay is a high priority from a financial planning perspective. Making real estate an active asset instead of a dormant asset in retirement enables an advisor to create long term tax savings for their clients,” says Jeff Spencer, vice-president with HomEquity Bank.
In an era when more Canadian seniors are house-rich but income-poor the reverse mortgage becomes an important option. Studies show that many Canadians have not saved enough for retirement. Many Canadians have paid down their house by retirement. But retirees might not have the income or savings needed for maintenance, home-care or other essential services. Which is where the reverse mortgage comes in. Using real estate as a planning tool is more important than ever.
For the planner the benefits are obvious. The advisor can reduce the redemption rate of a book of business, preserve existing assets under administration by alleviating the need to sell investments, add value from a financial planning perspective by better illustrating to clients the reason they need a planner. That is, a reverse mortgage can help retain clients, consolidate their assets while expanding a client base in a growing market segment.
Another advantage is the case of clients who need to ‘bridge' assets in the case of an early retirement package or a desire to retire early. The Income Advantage solution allows the planner to build appropriate scenarios. Create a higher monthly cash stream for four or five years before reducing the fund flow to a long term cash flow amount. This bridging period can be set up without tax implications while allowing portfolios to grow longer in a tax efficient manner.
Another challenging area for planners is managing the unexpected lump sums clients sometimes need. A pay out of a larger lump can have a significant negative impact on retirement projections. The Advantage plan offers a tax-efficient method of funding ongoing costs. “The tax savings for many can far outpace any interest they are accumulating in their reverse mortgage and have a net positive impact on the client’s net worth,” says Spencer.
In an ever-more competitive world, every option that can help a client achieve retirement goals has to be considered.
Key to unlocking the planning potential in a reverse mortgage is to understand the unique tax advantages that apply to plans like the HomEquity Bank Income Advantage plan.
Revenue Canada rules are clear: When it comes to reverse mortgages resulting cash flows are not taxable since these funds are equivalent to loan advances from a traditional mortgage. This simple, but powerful detail means reverse mortgages can be extremely useful as a general planning tool.
Here is how to do it: Take tax-efficient money from a client’s home, take less from their taxable investments and pensions. By doing so the advisor optimizes the de-accumulation of investment assets. This allows clients to better control how much tax they pay while shrinking long-term tax liability. By avoiding withdrawals from the investment portfolio a planner can more effectively manage a client’s estate. The advisor increases tax planning flexibility, controls tax brackets, avoids claw backs, but, more importantly gets money out of taxable scenarios at the lowest tax rate possible.
Advisors can also allocate sums of money to beneficiaries on a more tax-efficient basis. "Controlling the amount of tax you pay is a high priority from a financial planning perspective. Making real estate an active asset instead of a dormant asset in retirement enables an advisor to create long term tax savings for their clients,” says Jeff Spencer, vice-president with HomEquity Bank.
In an era when more Canadian seniors are house-rich but income-poor the reverse mortgage becomes an important option. Studies show that many Canadians have not saved enough for retirement. Many Canadians have paid down their house by retirement. But retirees might not have the income or savings needed for maintenance, home-care or other essential services. Which is where the reverse mortgage comes in. Using real estate as a planning tool is more important than ever.
For the planner the benefits are obvious. The advisor can reduce the redemption rate of a book of business, preserve existing assets under administration by alleviating the need to sell investments, add value from a financial planning perspective by better illustrating to clients the reason they need a planner. That is, a reverse mortgage can help retain clients, consolidate their assets while expanding a client base in a growing market segment.
Another advantage is the case of clients who need to ‘bridge' assets in the case of an early retirement package or a desire to retire early. The Income Advantage solution allows the planner to build appropriate scenarios. Create a higher monthly cash stream for four or five years before reducing the fund flow to a long term cash flow amount. This bridging period can be set up without tax implications while allowing portfolios to grow longer in a tax efficient manner.
Another challenging area for planners is managing the unexpected lump sums clients sometimes need. A pay out of a larger lump can have a significant negative impact on retirement projections. The Advantage plan offers a tax-efficient method of funding ongoing costs. “The tax savings for many can far outpace any interest they are accumulating in their reverse mortgage and have a net positive impact on the client’s net worth,” says Spencer.
In an ever-more competitive world, every option that can help a client achieve retirement goals has to be considered.
