I want to offset RMD income with a mortgage interest deduction
Dear Dan,
I want to reduce the tax bite once I start taking required minimum distributions. I was looking at Roth conversions, but I am thinking of going in a different direction. Instead, I was considering a cash-out refinance and offsetting RMD income with mortgage-interest deduction. My wife and I might invest the proceeds, start gifting to family or buy a vacation home. All things being equal, I think this could work.
— RMD Strategist
Dear RMD,
All things are rarely equal.
There are a number of potential issues with your alternative plan, however. First, mortgage interest is not eligible to be used as a deduction unless it is “acquisition debt.” That is defined as debt used to “…buy, build, or substantially improve your home.” That means if you use the funds for things like investing or gifting to family, the interest doesn’t qualify. Details on this and other issues related to mortgage interest are found in Publication 936.
Normally, mortgage interest on a second home can be deductible. However, to deduct the interest, the mortgage must be on the property acquired. Further, a household can only deduct mortgage interest on a maximum of $750,000 of combined debt on the two properties when the debt originates on or after Dec. 15, 2017.
As a result, you would likely be better off buying the vacation home using a traditional mortgage arrangement on that property. However, even if you got the vacation home in that manner, the interest may still not offset any of your RMD because eligible mortgage interest is an itemized deduction.
The standard deduction for 2026 for a married couple filing jointly is somewhere between $32,200 and $35,500, depending on age and income. Each taxpayer over 65 (or blind) gets an additional $1,650 standard deduction — so a couple could get an extra $3,300. As a result, it is common for some or all of the mortgage interest paid to fail to reduce your tax bill.
For instance, if you and your spouse are both over 65, your total standard deduction is $35,500 ($32,200+$3,300). You get this deduction regardless of how much mortgage interest you pay. If all of the expenses you could use as itemized deductions — other than the mortgage interest — totaled $20,000, the first $15,500 in mortgage interest paid does nothing to reduce your taxable income. It is eaten up by the standard deduction.
Further, regardless of whether one itemizes or uses the standard deduction, an additional $6,000 deduction is available to many taxpayers over 65. In the above example, the couple, both 65, could see their taxable income reduced by an additional $12,000. However, this “enhanced senior deduction” won’t offset income from a Roth conversion for all taxpayers.
A conversion will raise your Modified Adjusted Gross Income (MAGI). The enhanced senior deduction begins to phase out when MAGI reaches $75,000 for a single filer; the deduction is eliminated when MAGI hits $175,000. For joint returns, the phaseout range is $150,000 to $250,000 of MAGI.
Roth conversions do not avoid taxes; they accelerate them. For those in a tax bracket this year that is expected to be lower than the tax bracket applied to future RMDs, conversions may reduce the tax bite over the life of the IRA.
If you are not careful, a conversion can make the cost of the conversion higher than the tax bracket you expect. In addition to reducing or eliminating the enhanced senior deduction, higher gross income can trigger a Medicare premium increase, additional taxes, or a reduction in the itemized deduction for medical costs.
If you do not expect tax rates applied to your future RMD to be higher than the rate you would pay upon converting, a Roth conversion may not be a good strategy.
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Originally published on MarketWatch. Read the original article here.