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Financing 2nd Home with 401K
Old 05-08-2019, 08:09 AM   #1
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Financing 2nd Home with 401K

Looking for some creative ideas here.

Considering buying a second "overlap" vacation home that we would have for 3 years until DW retires then sell primary residence and live there full time. I FIRE'ed 2+ years ago. DW will work 3 more years, she will turn 60 this summer and is past 59.5 years. Her 401K is about 20% of our portfolio and I was thinking of robbing it of about 70% of its value to buy this property.


Until I realized that we would have to pay 32% income tax on the sum.


Don't have any other source of tax free $$ that I can use. Thought of getting another mortgage I don't like. Primary house mortgage is fairly small and we have maybe 67% equity in it.


Ideas? Loan on 401K limited to $50k right? Roll it to an IRA get us anything? Home equity loan make any sense?


Thanks
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Old 05-08-2019, 08:54 AM   #2
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I would need specific numbers to give an accurate assessment. That said, I would not take enough out of 401K to put my taxable income into the 32% bracket. Seems to me you will have to go without the house or get a mortgage.
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Old 05-08-2019, 09:07 AM   #3
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Why not just wait until you are ready to sell the main home to buy the next home?

Cashing in retirement assets to buy additional pieces of real estate seems speculative and potentially harmful to your retirement -- especially if there are no DB pensions available to you.

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Old 05-08-2019, 09:48 AM   #4
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I would need specific numbers to give an accurate assessment. That said, I would not take enough out of 401K to put my taxable income into the 32% bracket. Seems to me you will have to go without the house or get a mortgage.
+1
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Old 05-08-2019, 10:01 AM   #5
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+2 .... overall a horribly bad idea... you're proposing to voluntarily give 10-22% of what you withdraw for the second home to the federal government (plus state income taxes too) just because you don't like the idea of a mortgage? Get over your dislike of another mortgage and finance it that way, and then you can use smaller withdrawals from tax-deferred funds for mortgage payments and avoid the onerous tax hit. Another option might be to refinance with cash out or HELOC on your main home and use the proceeds for the second home, then pay it off when you sell your main home.
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Old 05-08-2019, 10:04 AM   #6
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A deferred income withdrawal is taxed the same be it from an IRA or a 401k, so no advantage to rollover.
A way out there idea is to do a "self directed IRA" that buys the house, but it would have to be for rental property... not for you to use yourself.

A HELOC is worse than a mortgage (lower limits, higher interest).

Get a mortgage or wait until your ready to sell current home... even then a mortgage would be a good way to move at your leisure and then pay off the mortgage when current house sells. I'd wait... a second property unoccupied half of the time is a maintenance headache.
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Old 05-08-2019, 08:43 PM   #7
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Why not just wait until you are ready to sell the main home to buy the next home?

Because this opportunity/property is very, very, very (did I say very) unique. It is a waterfront home that *could* be a permanent home when the time comes. I am not locked into it, but I am sure that we will never see something like this, at this price, available to us again.
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Old 05-08-2019, 08:48 PM   #8
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^^^ in which case it would be worth taking out a mortgage for a few years to take advantage of this very, very, very, very unique opportunity.
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Old 05-08-2019, 08:51 PM   #9
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+2 .... overall a horribly bad idea... you're proposing to voluntarily give 10-22% of what you withdraw for the second home to the federal government (plus state income taxes too) just because you don't like the idea of a mortgage? Get over your dislike of another mortgage and finance it that way, and then you can use smaller withdrawals from tax-deferred funds for mortgage payments and avoid the onerous tax hit. Another option might be to refinance with cash out or HELOC on your main home and use the proceeds for the second home, then pay it off when you sell your main home.

Short answer: Yes.


More time to think about this and I have come up with some crafty ideas for financing *if* we buy it. I am realizing that DWs 401k is a great resource if we trickle funds out of it over time. I had a decent p[ile of cash sitting to fund travel and (primary) home improvements for 2019 and 2020, and some severance lumps sum deposits that were to be used to supplement DWs monthly paycheck to meet budget; ALL of which were monthly trickle requirements.

Where I am now is that I can probably come up with hard cash for 50% of the offer, then borrow money to make the rest, and fund that loan DW 401K withdrawals that don't kick us up to stupid tax brackets.

Still, a very interesting and fun financial exercise. Nothing cemented yet. Checking with bank about HELOC options now. Makes sense. Thanks for the inputs....
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Old 05-08-2019, 11:04 PM   #10
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Use a HELOC and mortgage to buy the new house, and then make interest payments from your sources of cash.

Frankly I find it weird you want to drain your wife's 401K of 70% of it's value, as you are giving up the benefits of the 401K pretty easily.
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Old 05-09-2019, 04:53 AM   #11
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Considering buying a second "overlap" vacation home that we would have for 3 years until DW retires then sell primary residence and live there full time.
Why are you considering buying this second home now, rather than just waiting 3 years?

We purchased our beach weekend/vacation home 7 years ago. We used it pretty much every weekend and every vacation. We extended our weekends to include Fridays and babysat our grandchildren there on Thursday nights and Fridays as well.

Last month we sold our primary residence and moved into the beach home full time.

For us, we had enough income that it made sense to do something with the money, and we had enough cash for the 20% down payment. The housing market was at a relative low at that time, so we were able to get a great price.

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Don't have any other source of tax free $$ that I can use. Thought of getting another mortgage I don't like. Primary house mortgage is fairly small and we have maybe 67% equity in it.
We got a mortgage. It was easily affordable and gave us a helpful tax deduction at the time.

Will the proceeds on the sale of your primary residence yield enough to pay off a mortgage on the second home? If so, perhaps realizing that the new mortgage would only last 3 years would make you feel better?
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Old 05-09-2019, 06:14 AM   #12
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We are doing something similar. We will be buying a new house (maybe building) before our current house is sold. We plan on getting a mortgage. The down payment for the new house will come from the proceeds from the sale of our snowbird condo. Then pay off/ pay down the mortgage from the proceeds from our house when it sells. SS at FRA will kick in in about 2 years to make the house payments if need be. I don't want to finance any part of the new house with IRA money unless the amount is < $50k. I don't want to jack up our tax rate.
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Old 05-09-2019, 06:18 AM   #13
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Looking for some creative ideas here.
Her 401K is about 20% of our portfolio and I was thinking of robbing it of about 70% of its value to buy this property.
...

Don't have any other source of tax free $$ that I can use.



Thanks
Some detail is missing here. If her 401k is 20% of the portfolio, where is the other 80%? What I am getting at is whether some of those assets could be used as collateral (e.g. a margin loan at Interactive Brokers is 3.41% on a 100K+ margin loan). While there is risk of rate movement (and risk of call if your asset values collapse) on this vs. a fixed rate mortgage, it does have the advantage of minimal/no fees for setup.
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Old 05-09-2019, 06:26 AM   #14
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I don't understand the reluctance to take a mortgage, while you are considering taking out a HELOC or 401K loan. They are all loans, and a mortgage probably has the best terms, doesn't it? You can pay off all or most of the mortgage when you sell your current home.

I certainly wouldn't take the tax hit of withdrawing from the 401K,if you can even do that while she's still working.
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Old 05-09-2019, 06:30 AM   #15
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Alternative points of view...

1) 401k loan amounts vary by plan. Check plan limits
2) how much would be borrowed?
3) what would the payoff plan be for the loan balance? 70% of 401k value paid back in 3 years?
4) If you did the 401k loan, treat the loan like a bond, and adjust asset allocation accordingly

I would suggest the loan is an "OK" idea if
a) you can pay back loan while wife is working (meaning pay loan back in 3 years)
b) you are familiar with real estate in area you are buying (have you vacationed or rented frequently in this area before)
c) other numbers line up that this is a good idea

Other scenarios
401k loan for down payment, take a mortgage for the rest, then pay off mortgage once primary residence is sold
retire now, sell primary residence, buy new house with proceeds.
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Old 05-09-2019, 06:35 AM   #16
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Another creative financing idea - if you need the money short term and could secure financing in the meantime...

60 day loan from your IRA. Look here for more details.

It would required you to pay back within 60 days to not have a withdrawal event and potentially 10% penalty.
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Old 05-09-2019, 06:38 AM   #17
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I would suggest the loan is an "OK" idea if
a) you can pay back loan while wife is working (meaning pay loan back in 3 years)
A 401k loan requires full pay back by the end of employment, so the lump sum of the balance would come due in 3 years.

In addition, your repayments to the loan are on post-tax dollars.. so you'd still pay the 32% or whatever tax bracket your DW is in, just later rather than all at once via a WD. (and check the rules, not all plans may allow for a home-loan from a 401k for a 2nd home, might only have this allowance for a first home?)

I only think a 401k home loan only makes sense for someone who has no home and has no other way to afford one, and even then, it's not as cheap and simple as many think.

You're also losing out on the continued growth of that money as it's no longer invested. (assuming market gains outpace RE gains which they do most of the time).

Mortgages are still low, taking one for 3 years now and then paying it off when you move there is the best route.
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Old 05-09-2019, 07:18 AM   #18
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Because this opportunity/property is very, very, very (did I say very) unique. It is a waterfront home that *could* be a permanent home when the time comes. I am not locked into it, but I am sure that we will never see something like this, at this price, available to us again.
Proceed carefully here you are already in love which this property...have you already made an offer, I can't tell from what you have written..
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Old 05-09-2019, 07:54 AM   #19
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Why are you considering buying this second home now, rather than just waiting 3 years?

Read my second post above.


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Will the proceeds on the sale of your primary residence yield enough to pay off a mortgage on the second home? If so, perhaps realizing that the new mortgage would only last 3 years would make you feel better?

Easily, by at least 2x.
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Old 05-09-2019, 07:59 AM   #20
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Some detail is missing here. If her 401k is 20% of the portfolio, where is the other 80%? What I am getting at is whether some of those assets could be used as collateral (e.g. a margin loan at Interactive Brokers is 3.41% on a 100K+ margin loan). While there is risk of rate movement (and risk of call if your asset values collapse) on this vs. a fixed rate mortgage, it does have the advantage of minimal/no fees for setup.

I have a 401K that is 44%, and an IRA that is 20% of, and then some smaller accounts with piddly balances. Roth's HSA, etc. I failed to mention that I am 57, so I can't go into mine without penalty. That is why DW's is the target and I see it as just moving some portfolio from one kind of holding to another. And it looks like I can scrape up nearly 50% of the offer price in cash and borrow the rest. We'll see where this goes. If it happens, I'll post a pic. A really unique piece of real estate...
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