I’m 65 and want to help my mom with the reverse mortgage on her $1.5M home by tapping into my 401(k). Is this risky?

Typically, the reverse mortgage is paid back to the lender when you sell the house, or when you die. There may also be stipulations in the reverse mortgage that you must live in the home as your primary residence.

The FTC also notes that you must still have enough money to pay for taxes, insurance, repairs, and homeowner association fees. According to AARP, if you do not adhere to the loan’s terms, which typically include maintaining the home as your primary residence, and staying current on property taxes, home insurance and home maintenance, you risk foreclosure. (2)

According to the FTC, “the money you get through the reverse mortgage is tax-free and won’t affect your Social Security or Medicare benefits.”

Some older adults may choose a reverse mortgage if they do not want to leave their neighborhood, and buying another, smaller property in the same area would mean using a large portion of the proceeds from selling their existing home. This can be especially true in high cost of living areas.

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Is tapping a 401(k) to help a parent a good idea?

Since Veronica is older than 59 ½ years old, she would not face the 10% early withdrawal penalty for taking funds out of her 401(k). (3) When she reaches age 73, she will be required to start withdrawing required minimum distributions (RMDs) from her 401(k), unless she continues working.

She will have to pay taxes on the withdrawals she makes, however. Since she is planning on making a large withdrawal to help her mother, and because she is still working, she should consider speaking to a tax professional about how much this withdrawal would be likely to cost her. She could also have to pay taxes on her Social Security benefits, if her income is pushed higher due to the withdrawal.

She should also strongly consider speaking to a financial planner, with the first order of business being her own retirement plan, and making sure she has a solid plan for her future.

Once she is certain that her own finances are in order, then Veronica can consider the best way to help her mother. The big considerations here are, first and foremost, finding a sustainable way for her mother to live. This may involve hard decisions, like selling the family home.

Veronica’s complicated plan to pay back her mother’s reverse mortgage, and then potentially take out another mortgage on her mother’s house in her own name, could cause a financial mess.

Since Veronica has siblings, who are also intended to be heirs when their mother dies, Veronica should seriously consider the impacts on mother’s estate from putting a large amount of her own money into her mother’s main asset.

Veronica and her mother should consider speaking with an estate attorney about the implications this decision would have. They should find out whether it would be possible for Veronica to be paid back from the estate when her mother passes.

Veronica also needs to check the loan agreement to make sure there are no fees or conditions for paying back the loan.

Reverse mortgages can be desirable options for older adults who do not have enough retirement savings to live on.

However, as Veronica’s mother’s situation makes clear, there are risks to reverse mortgages, including running out of equity, having fewer options if you want to move later, or leaving a financial quagmire for your heirs.