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Estimated Tax Savings Using HECM Interest Stacking
$0
vs. paying the same number of conversions from the IRA
Tax Efficiency: – / 10 Score on a 0–10 scale comparing the stacking strategy to paying tax from the IRA. 10/10 = stacking eliminated all conversion tax; 0/10 = stacking saved nothing. Calculated as (1 − stacking_tax / IRA_tax) × 10.
Starting HECM LOC Available HECM line of credit at closing = Principal Limit (PLF × Max Claim Amount) − starting balance (existing mortgage + financed closing costs).
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Available credit at setup
LOC After 20 Years Tax-free pool of equity available at the end of the projection. Principal Limit grows at the HECM accrual rate (note + 0.5% MIP), reduced by any outstanding balance.
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Tax-free pool of available equity
Additional Roth Wealth Created Difference in final Roth balance between HECM Interest Stacking and the Pay-Tax-from-IRA scenario, holding the conversion schedule constant.
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Stacking vs. paying tax from IRA
Stacking Cycle Scenario · Periodic Conversions
This model runs all three scenarios on the same cycle schedule: each cycle
has a snowball phase (interest accrues, no payments), then
a shield year where the Roth conversion is executed and a
matching IRC §163 interest deduction is generated by an outside-cash
payment to the HECM. The LOC is replenished on each payment. Use the controls
below to set cycle length; the number of cycles auto-syncs to match the
projection period set in the left panel.
HECM Balance — Stack & Pay Trajectory
Balance starts at existing mortgage + financed closing costs ▲
grows during snowball ▼ drops on each outside-cash payment ·
🔴 peak ● after payment — deductible interest decreases each cycle
Cycle Model: Starting HECM balance = existing mortgage payoff + financed closing costs
(upfront MIP 2% of MCA, origination fee, other costs). Principal Limit = PLF × Max Claim Amount
(lesser of home value and 2026 FHA HECM limit of $1,249,125). PLF looked up from the official HUD Consolidated PLF Table (ML 2017-12), with the expected rate rounded up to the nearest 1/8% per HUD rules. Available LOC = Principal Limit − Starting Balance.
Each year the full outstanding balance accrues interest at the total accrual rate (note rate + 0.5% annual MIP).
In the shield year, a voluntary outside-cash payment first covers all accrued interest
(the IRC §163 deductible amount reported on Form 1098), then reduces principal.
LOC is replenished each year as Principal Limit (grown at accrual rate) − outstanding HECM balance.
Deductible interest decreases each subsequent cycle as the outstanding principal is paid down.
Net tax = max(0, gross conversion tax − (deductible interest × deductible portion %)).
IRC §163 deductibility requires the HECM to refinance acquisition indebtedness subject to cap; consult a CPA.
Strategy Comparison · Three Approaches on the Same Cycle Schedule
Pay Tax from IRA Final Roth balance when each conversion's tax is paid out of the IRA itself. Reduces the amount that lands in the Roth and lets compounding work on a smaller base.
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Roth balance at end of projection
Pay Tax from Savings Final Roth balance when conversion tax is paid from outside cash reserves. Full conversion enters the Roth, but the cash reserve is depleted (not modeled as a drag here).
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Roth balance (cash reserves depleted)
✓ HECM Interest Stacking Final Roth balance when the §163 deduction from HECM interest offsets conversion tax. Full conversion enters the Roth and the HECM is repayable from home equity at any time.
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Roth balance · HECM repayable from equity
Detailed Comparison
| Method | Total Tax Paid | Net to Roth (per Event) | Roth @ Mid-term (10 yrs) | Roth @ End (20 yrs) | Tax Efficiency |
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Roth Balance Growth Comparison
All three methods over 20 years (shared cycle schedule)
HECM Line of Credit Growth
Available credit grows, dips on draw, rebounds on payment
Ready to see this modeled for a real client?
These numbers are illustrative. A full personalized analysis uses the client's actual home appraisal, IRA statements, and tax situation. We'll run the complete model at no cost.
Model Assumptions: All three scenarios use the same cycle schedule (one conversion per cycle on the shield year).
Option 1 (Pay from IRA) — full tax paid from conversion, net (conv − tax) enters Roth.
Option 2 (Pay from Savings) — full conversion enters Roth; tax paid from external reserves (not modeled as depleted for Roth balance purposes).
Option 3 (HECM Interest Stacking) — full conversion minus net tax after deduction enters Roth; HECM balance accrues at note rate + 0.5% MIP; outside-cash payment on shield year covers accrued interest (deductible up to deductible portion input) then principal.
HECM LOC = Principal Limit (grown at accrual rate) − outstanding balance, floored at 0.
Home equity at end of projection equals home value (grown) minus HECM balance.
All projections hypothetical, assume constant rates. Past performance and modeled outcomes are not guarantees of future results.
Not financial, tax, or legal advice. Sources: Dr. Barry Sacks — Journal of Taxation; Dr. Wade Pfau — The American College of Financial Services; IRC §163.