Locking in gains for home downpayment

[younginvestor2013]

I understand that, at its core, this question is basically a market timing question, but I'll ask it any way.

If you thought you might buy a home in the next year or two (or sooner), and the funds you needed for the downpayment and closing costs were invested in the stock market right now, would you go ahead and sell whatever $ amount you'd need to lock in gains? And let those funds sit in a savings account?

Like many others, my brokerage account has seen some very nice gains, up 22% since last November, and has almost earned more in unrealized gains than I have at my W2 job.

I'm not positive that I will in-fact buy a house, but it is a possibility.

The downsides that I see on doing this are:

1) I don't buy the house, the market improves in 2018, and I buy in at higher values
2) Obvious tax hit - although they are all long term gains

If I don't buy the house and the market goes down, I could always re-invest the funds at lower valued prices. Of course I would have paid taxes on the gains, but those taxes would likely have to be paid at some point so that would have been more of a then vs. now scenario.

Also, if the market tanks and I then decide to liquidate to buy a house, I'd be in a much less favorable position.

Thoughts? What am I missing?

Not really looking for any criticisms on how I don't know if I'd buy a house or not. I'm 28 and still figuring things out in life

 

[SecondCor521]

I'd sell stock and pile up cash to the degree I was certain I would be buying a house.

For example, if your downpayment would be $100K and you're 80% sure you'd buy a house, I'd make sure I have $80K in cash now, selling stock if needed to get it.

(Hopefully this doesn't violate the restriction in your last paragraph: If you were my kid, I'd advise you to not buy a house until you were sure you were going to stay in that area for at least three, preferably five years. The general wisdom is that the transaction costs of buying and selling, as well as the risk of a price downturn, makes it too expensive to buy.)

Good luck!

 

[pb4uski]

If these are individual stocks you could put in a stop-loss order.... if the ticker continues to climb then refresh it at a higher strike price... if it tumbles then it will execute.

Alternatively, you could by put options on individual tickers or on indices to hedge your gains without giving up any upside, but at a cost.

 

[audreyh1]

Yes, because house down payment money needed within 5 years shouldn’t be invested in stocks.

Think hard about buying a house anyway.

 

[RunningBum]

Yes, I'd sell or at least put in a stop loss order.

 

[joeea]

If you thought you might buy a home in the next year or two (or sooner), and the funds you needed for the downpayment and closing costs were invested in the stock market right now, would you go ahead and sell whatever $ amount you'd need to lock in gains? And let those funds sit in a savings account?

Yes.

Unless I was willing to let the anticipated date of home purchase slide (perhaps for a long time).

Money needed in the short term (next few years) doesn't belong in the stock market, IMHO.

 

[movingrightalong]

IMO, this is more of an asset allocation issue than a market timing question. The advice in the previous replies is sound for funding what you want to do.

 

[45th Birthday]

When I don't see a clear answer on issues like this, I punt and do half. Sell half but protect the other half with stop loss orders or options.

The portion of your portfolio needed for the house purchase might slide the sell percentage up or down. The higher the ratio of house costs/portfolio, the more I would consider selling.

 

[Meadbh]

If I was pretty sure I was going to buy a house, I would definitely liquidate the assets required for the down payment, and a little extra for closing costs.

 

[travelover]

I had a similar problem when I sold my house last January - whether to stick the proceeds in stocks or into CDs, knowing I want to re-buy with 18 months. Of course, I put them into CDs in spite of the fact that I'd be up 15% or more if I'd taken the gamble.

 

[Scuba]

Yes.



Unless I was willing to let the anticipated date of home purchase slide (perhaps for a long time).



Money needed in the short term (next few years) doesn't belong in the stock market, IMHO.

+1

 

[younginvestor2013]

Thanks for all your responses.

If I sold enough for a downpayment and closing costs, I've calculated a capital gains tax bill for my 2017 taxes of about $6k. This is assuming a 15% LT capital gains tax and 4.95% IL tax. These funds currently have unrealized LT gains of anywhere from 163% to 185% of their original cost basis, most of them having been originally purchased in 2013 or 2014.

Does anyone have any strategies for reducing capital gains taxes, besides offsetting with losses? Since the goal is to "lock in" some gains, I don't think selling at a loss makes sense. Plus, I don't have any losses to possibly realize

Just curious if there is anyway I can avoid paying $6k to Uncle Sam!

 

[pb4uski]

What tax bracket are you in before considering gains? Are you aware that for those in the 15% tax bracket and lower that LTCG are 0% and not 15%?

If you are just barely over the top of the 15% tax bracket with the gains you might make higher 401k contributions or deductible IRA contributions to bring yourself below the top.

 

[younginvestor2013]

Are LTCG 0% if your taxable income (i.e., total income less itemized deductions and standard exemptions) falls in the 15% bracket (under $37,950 for 2017 for single filers) or your gross income (not factoring in any deductions/exemptions) is less than $37,950?

YTD, I've almost maxed out my roth 401K. Is it possible to retroactively "switch" it to a traditional 401k contribution for the year? I'm guessing not, since it's already been taxed.

 

[younginvestor2013]

Also, same question for Roth vs traditional IRAs. I've maxed out my Roth IRA already for 2017 but is there a way to switch it to a traditional so as to reduce my taxable income?

 

[SecondCor521]

Are LTCG 0% if your taxable income (i.e., total income less itemized deductions and standard exemptions) falls in the 15% bracket (under $37,950 for 2017 for single filers) or your gross income (not factoring in any deductions/exemptions) is less than $37,950?

YTD, I've almost maxed out my roth 401K. Is it possible to retroactively "switch" it to a traditional 401k contribution for the year? I'm guessing not, since it's already been taxed.

I believe it's taxable income, but you could check the IRS worksheets to be sure.

I doubt your company will let you retroactively switch your contributions. As you note, it would be a payroll nightmare not to mention that it probably isn't allowed.

Also, same question for Roth vs traditional IRAs. I've maxed out my Roth IRA already for 2017 but is there a way to switch it to a traditional so as to reduce my taxable income?

Yes. Call your custodian and have them recharacterize the contribution(s). You probably want to do this before the end of this year as there is ambiguity whether recharacterizations will be allowed starting 1/1/18 due to the current tax bill. See the tax bill thread for discussions on this aspect of the law.

Note that the amount your custodian moves will likely not be the same as your contribution total. They have to adjust it up or down for gains or losses and dividends and such. For tax purposes it will be treated as though you made the contributions to your traditional IRA originally.

 

[younginvestor2013]

Thank you for this valuable info!

Assuming I would be able to switch my Roth IRA and 401k to traditional contributions (instead of Roth), I would need to come up with an additional $2,400 - $4,000 (it will depend on what Q4 dividends are) to deduct in order to get my taxable income below $37,950, which is the 15% cap for single filers. I'm going to ask HR if it is possible to switch.

Does anyone know of other deductions that I may be overlooking? Below is a list of my ones I am currently estimating:

HSA Contribution: $3,400
State Income Tax: $3,225
RET: $4,041
Mortgage Interest: $7,200
Standard Exemption: $4,050
Possible 401K: $18,000
IRA: $5,500

 

[SecondCor521]

You've hit the main ones. Others that might apply are realizing capital losses, business losses, property taxes, and charitable contributions (assuming you're itemizing since you're not listing the standard deduction). For a complete list just take a look at a form 1040.

 

[younginvestor2013]

I just got off the phone with Fidelity (my 401k is with Fidelity). They said that it is not possible to do a retroactive Roth 401k ---> traditional 401k change for 2017. The individual I spoke with has never been asked that but looked into it and said it was not a possibility.

As a result, it does not look like I'll be able to get my taxable income low enough to avoid capital gains.

So I need to decide if it is worth paying about $6k in capital gains tax to lock in some of these gains.

 

[pb4uski]

Are LTCG 0% if your taxable income (i.e., total income less itemized deductions and standard exemptions) falls in the 15% bracket (under $37,950 for 2017 for single filers) or your gross income (not factoring in any deductions/exemptions) is less than $37,950?

YTD, I've almost maxed out my roth 401K. Is it possible to retroactively "switch" it to a traditional 401k contribution for the year? I'm guessing not, since it's already been taxed.

Taxable income... if your TI is in the 15% tax bracket then qualified dividends and LTCG included therein are 0%.

 

[pb4uski]

I just got off the phone with Fidelity (my 401k is with Fidelity). They said that it is not possible to do a retroactive Roth 401k ---> traditional 401k change for 2017. The individual I spoke with has never been asked that but looked into it and said it was not a possibility.

As a result, it does not look like I'll be able to get my taxable income low enough to avoid capital gains.

So I need to decide if it is worth paying about $6k in capital gains tax to lock in some of these gains.

What if you just wait and do the sale in 2018 and do 401k contributons instead of Roth contributions to keep your income low enough to get 0% LTCG? Is that a possibility?

 

[younginvestor2013]

At this point, I'm not sure.

I am anticipating a $10-18k raise at work. If that happens, then it wouldn't be a possibility.

If it doesn't happen, then maybe. But I'd still have about a $3-4k gap. I'd have to come up with additional deductions other than the ones I've already mentioned. I believe the only items are charitable contributions?

 

[RenoJay]

Yes, I’d have down payment in a liquid account.

 

[younginvestor2013]

Is there a way to use Roth IRA or Roth 401k funds for downpayment on a house with no tax or penalties due?

If so, I could liquidate funds in either accounts and keep in a money market account with the intent to use those funds. Assuming I only W/D principal, I don't believe any taxes or penalties would be incurred?

But then again, I guess this goes against my whole point to lock in some gains..... since I would be just pulling out principal payment contributions. But I would be avoiding a $6k tax bill.

Am I thinking through this correctly?

 

[pb4uski]

It might be best to just suck it up and pay the $6k of tax.... but what about a loan from your 401k? On a Roth you can withdraw contributions but you then lose the tax-free attribute on those funds forever.