No Rest for the Mortgage and IRA Weary

Gray Matters' columns last month on reverse mortgages and IRA rollovers seemed to have raised as many questions as they answered. So let us pause for some of the comments and questions from readers, and clarifications from experts.

We believe that a reverse mortgage, especially the Home Equity Conversion Mortgage (HECM) backed by the Federal Housing Administration, can be a lifesaver. Yet too many people who are house-rich and cash-poor fail to take advantage of this relatively easy way to convert the equity in their homes into cash, a monthly income or line of credit tax free.

Some readers feared they would lose their homes. Others said they didn't want to burden their kids with a lien on the home. And a few complained that the reverse mortgage they'd get was less than they could get for a conventional first mortgage.

But Martin Dekom, a reverse mortgage specialist for Americana Mortgage in Manhasset, points out that a first mortgage for an elderly couple is fraught with the risk of default. Paying $2,000 a month on a $300,000 mortgage is a prescription for disaster.

The loan amounts may not be as great, but they're not peanuts. I visited AARP's www.reverse.org and www.financialfreedom.com and calculated the reverse mortgages for a 75-year-old couple with a $500,000 home in a Suffolk ZIP code. FHA offered $183,000 for its HECM; Fannie Mae's "Homekeeper" offered $100,600, and Financial Freedom $114,700.

Generally, the reverse mortgage, Dekom said, amounts to one-third to one-half the value of the home. The loan is limited, in part, to assure borrowers that there is no risk the homes could be lost during their lifetimes, even if the loan amount (plus interest and closing costs) exceeds the home value.

Dekom said, "The biggest risk is if someone moves out of the home [or dies] within a few years of getting the mortgage. The closing costs and fees would be payable. This is the same risk with a purchase mortgage." If the borrower remains in the home long enough, closing costs are amortized. Beware of the lender that deducts the costs from the loan proceeds. They're supposed to be part of the loan. The interest (tax deductible) is paid at the end of the loan.

On IRAs, we opened a can of worms on the rules for rollovers -- transferring a lump sum from a pension or 401(k) to an IRA, or more frequently, transferring or rolling over part or all of one IRA account to another to find greater returns. We're not talking about rolling over a maturing CD within an account.

As I wrote, a rollover must be completed within 60 days. And I said the IRS limits you to one rollover per year. But Rockville Centre CPA Ed Slott said that means one rollover within 12 months, not a calendar year.

So Louis O., who rolled over a CD from one IRA account to another to get a better interest rate, asked whether he could do it again this year. Yes, Slott said, if the first rollover was more than 12 months ago. And one may roll over funds in several IRA accounts, but only one rollover per IRA is allowed in that 12 months.

Sheldon G. wanted to know whether he can roll over funds in an IRA before taking his annual Required Minimum Distribution. No, Slott said: "For any year you have a required distribution, the first money withdrawn must be used to satisfy that distribution. After that, you can roll the other IRA funds over. But a required distribution cannot be rolled over" into an IRA. It can be re-invested in a money market, a CD or the stock market.

A retired New York City teacher who transferred his $127,000 pension directly to a new IRA less than a year ago asks whether he can roll over the account to an IRA paying a higher interest rate. "Yes," Slott said. "If the first rollover was a direct trustee-to-trustee transfer, the once-a-year rule would not apply."

We had heard about annuities and were investigating them for our IRAs. We also heard bad things about pushy brokers over the years. So when we went to the ImmediateAnnuities.com site we were skeptical about calling them. But whenever we called their staff was really friendly. They answered all our questions and one of their reps even told us that at our ages there was no advantage to buying the annuity with our IRAs. These guys are really honest!

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An e-mail from B.K: "My wife is still working, 74 this month. Can she roll over 90 percent of her Keogh into IRA CDs and not have to make required distributions, since she will continue to work?" The Keogh is a savings plan, like a 401(k), mostly for the self-employed, Slott said, but the answers depend on whether she is an employee of the company that sponsors the Keogh, a part owner or self-employed and the sole owner of her company.

Said Slott: "If her Keogh plan allows the 90 percent rollover, she can do it. But that will not remove the mandatory distribution requirement [after age 701/2]. There is an exception to the regular required minimum distribution rules if you are still working for a company you do not own," but only if she remains on the company plan.

Slott added: "This 'still working' exception does not apply to IRAs ... and to plans of companies in which you own more than 5 percent. ... Since most Keogh plan participants own much more than 5 percent of the company (they usually own it all), the ' still working' exception does not apply to Keogh plan owners, either." More questions? Try www.irahelp.com and find the discussion forum.