Optimal way to free up short-term cash

[shortstop14]

Since we used most of our taxable account to get through the first 10 or so years of retirement bridging to Medicare age, we're kind of in a poor cashflow position. No issues with our normal expenses, but it's hard to find a tax efficient way to fund a large lumpy expense. Living expenses are funded by a couple of small pensions, my wife's Social Security and a traditional IRA withdrawal. Doing Roth conversions until RMDs start in three years. I waited until 70 to start my Social Security, and that starts in a few months.

But I'm in a situation where I'd like to make a real estate purchase in the near term, which will take about 17% of our retirement assets. There are a lot of good reasons to do this now. The property is in France, where our daughter and grandkids live, and taking out a short-term mortgage is really not a tenable solution there for a non-resident. We expect to be able to replace this withdrawal in the next few years.

Currently the assets are 83% tax deferred, 16% tax-free (Roths, cash) and under 1% in taxable. Not included in that, our house is paid off.

So I see my alternatives as:
- withdraw from traditional IRA. That will incur a painful tax bill, push us up into a high tier IRMAA bracket for a bit, lose the enhanced deduction for seniors. And that tax bill would require further withdrawals.
- withdraw from Roth IRAs. Cheapest in current tax consequences, but paid for in lost tax-free funds down the road, likely part of our daughter's inheritance.
- take out a home equity loan of some sort. Some interest expenses until we can pay it off in the next few years.

I'm currently leaning towards the last solution, but tossing it out there to see if I'm missing something obvious. This wasn't really part of my plan, but it's not a bad thing at all. Just moving assets from one pocket to another and trying to minmize annoying frictional costs.

 

[EastWest Gal]

If your daughter is going to inherit the property you are buying in France, then taking it from any source isn't going to matter that much. In the long run, taking it from the Roth saves more for the inheritance than any other solution. All other solutions send more money to the taxman and/ or the banks in the form of interest.

 

[shortstop14]

If your daughter is going to inherit the property you are buying in France, then taking it from any source isn't going to matter that much. In the long run, taking it from the Roth saves more for the inheritance than any other solution. All other solutions send more money to the taxman and/ or the banks in the form of interest.

Thanks for that perspective. It's true, she'll end up with both in the long run. so maybe it's a wash. Or a comparison of stock market return vs. French real estate return net of taxation. It's taken so long to build some value in the Roth accounts, it's more of a feeling thing that I'm losing the potential tax-free value it's taken to build up. Hard to give that up.

 

[pb4uski]

Why one or the other? It could be any combination thereof? Or keep the Roth and rent and avoid the hassles of foreign home ownership?

 

[NomDeER]

If your daughter is going to inherit the property you are buying in France, then taking it from any source isn't going to matter that much. In the long run, taking it from the Roth saves more for the inheritance than any other solution. All other solutions send more money to the taxman and/ or the banks in the form of interest.

Isn't she going to pay taxes on any inherited traditional retirement accounts? How high would the taxes be if the daughter inherited traditional IRA funds? If the OP's daughter is a French resident, then they should find out what the tax laws are in France. My understanding is that, unlike a number of other European countries, France does not tax inherited Roth IRAs and she would have ten years to withdraw the money tax-free from the inherited Roth IRA, while it continues to grow tax free. The OP definitely should confirm that. There definitely are countries in Europe that will tax withdrawals from a Roth IRA even though the original owner already paid taxes.

The OP definitely should be looking at various tax consequences (in both the U.S. and France) of selling various funds in the United States and buying property in France. Would the OP be a dual resident for tax purposes? Would the daughter living in France inherit the house at a stepped up basis? Would the daughter inherit American taxable investments at a stepped up basis under both American and French law or would there be expensive capital gains taxes under French law? (The OP mentioned "replacing this withdrawal" in a few years, but I don't know what that means. Putting it in a taxable brokerage account, which may or may not be inherited at a stepped up basis in France?) Would buying the house with a traditional IRA withdrawal now reduce RMDs and consequent IRMAA payments in the future?

 

[RetiredHappy]

I think I had previously read that foreigners pay a flat 30 percent tax to IRS for inheritance of a Traditional/Rollover IRA, unless she is also a US citizen, which then follows inherited IRA 10-year rule.

 

[Kings over Queens]

I don't know how long short term and next few years really mean.

The HELOC on the US based home gives the most flexibility, and can always be paid off by any of the other funding methods. Granted, comes with an interest expense, but gives you flexibility and not a large drain on cash.

 

[Koolau]

I just recall how much effort and planning I put into increasing my Roth IRAs. So far, I've been unwilling to touch them - even though that costs me some taxes when I use 401(k) money instead.

I do see the argument for using Roth money in this case. Just not sure I could pull the trigger on such a transaction. YMMV

 

[Sunset]

I think I had previously read that foreigners pay a flat 30 percent tax to IRS for inheritance of a Traditional/Rollover IRA, unless she is also a US citizen, which then follows inherited IRA 10-year rule.

This really varies a lot. It can be a 15% withholding (which is a foreign tax credit in the foreign Country), and further varies depending upon the USA - Foreign Country tax treaty (if applicable or existing, and there are a lot).
Also doesn't apply to US Citizens living in foreign countries (generally) as far at IRS is concerned as follows US tax law, but could be 10% IRS withholding and foreign Country may tax it.

It's complex like nuts.

 

[RetiredHappy]

This really varies a lot. It can be a 15% withholding (which is a foreign tax credit in the foreign Country), and further varies depending upon the USA - Foreign Country tax treaty (if applicable or existing, and there are a lot).
Also doesn't apply to US Citizens living in foreign countries (generally) as far at IRS is concerned as follows US tax law, but could be 10% IRS withholding and foreign Country may tax it.

It's complex like nuts.

I read that it is a flat 30% for IRA inheritance by a foreign citizen when I was planning for my estate. My family overseas are not US citizens.

 

[NomDeER]

I think I had previously read that foreigners pay a flat 30 percent tax to IRS for inheritance of a Traditional/Rollover IRA, unless she is also a US citizen, which then follows inherited IRA 10-year rule.

I think you may be referring to the American withholding percentage, which is frequently 30%. But, my understanding is that what the person initially and ultimately pays will depend on the country's tax treaty with the United States, the foreign country's own tax laws, and in some circumstances how the beneficiary receives/withdraws the money (lump sum, through a trust, through an IRA versus other retirement account, etc.) And being an American citizen often doesn't exempt the person from these complex rules if they are a dual citizen or an American citizen living abroad. I think that, at least under some tax treaties, the 10 year rule applies even to non-Americans. At least, that's what Fidelity and Vanguard both told me.

Thirty percent may not necessarily be what the foreign beneficiary ultimately pays, even for the American taxes. It's sometimes not American tax law that is the biggest issue because some countries will give a credit for American taxes paid but will require the beneficiary to pay the difference between that country's tax rate and the American tax rate. And the foreign country's tax rate is often higher. The taxes paid in a foreign country are going to depend on the laws of that country, including the tax treaty that country has with the United States. It varies widely. My beneficiaries almost certainly will have to pay more in taxes when they withdraw from retirement funds that they inherit from me. They definitely will pay more for anything in my brokerage because they will not get a stepped up basis. That is because of their country's treaty with the U.S. and their higher tax brackets as well as the fact that they tax Roth IRAs.

Like I said, though, my understanding is that the French treaty is better than the treaties that some other European countries have with the United States. For a significant amount of money, though, if I were the OP, I would make sure I understood the tax consequences of whatever I was planning to do. That includes decisions for the house and decisions related to inheritance.

The relevant tax laws definitely would impact my decision on whether and how to purchase the house in France. If - emphasizing if - I expected my daughter to inherit a significant amount of money as a French resident and she would have to pay no taxes on a Roth IRA but high taxes on a traditional IRA or even more on another type of deferred tax retirement account, I would take that into consideration. I have no idea if that is the case, though. Without knowing this information, I don't know how the OP can make an informed decision.

 

[shortstop14]

I've had to investigate French taxation and inheritance quite a bit. Since my daughter is a US citizen and French tax resident, as long as we are US tax residents and don't become French tax residents, we're good. The US / France tax treaty is actually very favorable, tax paid in the US essentially eliminates any French taxes - as long as we don't die as tax residents of France. Their gifting and inheritance taxes are on the recipients, unlike the US. And it's quite a bite. So gifting and inheritance are areas I'd had to pay attention to, but somewhat tangential to my current issues.

I'm not clear yet on capital gains on French real estate held by a US tax resident, though.

 

[shortstop14]

Why one or the other? It could be any combination thereof? Or keep the Roth and rent and avoid the hassles of foreign home ownership?

Yeah, a combination might find a sweet spot, especially if I can divide it over two years. Renting in France is a real challenge, they have so many protections for tenants that make renting more of a hassle than buying. But there are specific reasons for the property in question (which I'd prefer not to get into here) that make buying the best solution.

 

[shortstop14]

I just recall how much effort and planning I put into increasing my Roth IRAs. So far, I've been unwilling to touch them - even though that costs me some taxes when I use 401(k) money instead.

I do see the argument for using Roth money in this case. Just not sure I could pull the trigger on such a transaction. YMMV

Yes, it's almost an emotional connection at this point. But, maybe this expense is the reason for having them. The instant pain of removing six figures from the traditional IRA is real.

 

[shortstop14]

The HELOC on the US based home gives the most flexibility, and can always be paid off by any of the other funding methods. Granted, comes with an interest expense, but gives you flexibility and not a large drain on cash.

Kind of where my thinking has been leading. But the simplicity of using the Roth IRAs is also attractive.

 

[target2019]

OP, where did you shop for mortgages in France?

 

[Kings over Queens]

Kind of where my thinking has been leading. But the simplicity of using the Roth IRAs is also attractive.

You mentioned in the OP that the roth's are in cash, so there isn't any investment lost to compare to the interest paid on a HELOC. The thing I like about the HELOC is that the interest is marginal but what's more, it leaves you options. Once you let the genie out of the bottle with the roth, you can't get that money back in. Sure, you can do new conversions, and it sounds like that's your plan, but the lumpy money is gone.

You can always pay off the HELOC in 6 months, or whatever timeline fits your needs.

 

[shortstop14]

OP, where did you shop for mortgages in France?

I haven't shopped for a mortgage there. Too many headaches, from what I've been told by friends there, and I really don't need (or want) to carry a mortgage.

 

[shortstop14]

You mentioned in the OP that the roth's are in cash, so there isn't any investment lost to compare to the interest paid on a HELOC. The thing I like about the HELOC is that the interest is marginal but what's more, it leaves you options. Once you let the genie out of the bottle with the roth, you can't get that money back in. Sure, you can do new conversions, and it sounds like that's your plan, but the lumpy money is gone.

You can always pay off the HELOC in 6 months, or whatever timeline fits your needs.

I might have written sloppily, the Roths aren't in cash at this point, they contain mostly market index funds. They were positioned for growth to be passed on in inheritance, or assets of last resort for us. The loss I see is their value down the road as tax-free assets for my daughter. As you say, letting the genie out of the bottle.

The HELOC is a little administrative overhead, and some interest costs until it gets paid off.

 

[Kings over Queens]

I might have written sloppily, the Roths aren't in cash at this point, they contain mostly market index funds. They were positioned for growth to be passed on in inheritance, or assets of last resort for us. The loss I see is their value down the road as tax-free assets for my daughter. As you say, letting the genie out of the bottle.

The HELOC is a little administrative overhead, and some interest costs until it gets paid off.

All things equal, you make more money in investment gains with the roth money than the cost of capital (interest) with the HELOC, and you retain optionality with the HELOC. You can always pay it off at any time with the roth, deferred, or combo, as circumstances warrant.

Want me to play devils advocate and sell you on using the roth?

 

[Kings over Queens]

I'm a big fan of options and not letting good be the enemy of perfect.

 

[shortstop14]

All things equal, you make more money in investment gains with the roth money than the cost of capital (interest) with the HELOC, and you retain optionality with the HELOC. You can always pay it off at any time with the roth, deferred, or combo, as circumstances warrant.

Want me to play devils advocate and sell you on using the roth?

I never mind a little devils advocacy. Obviously there's no guarantee that the Roth accounts increase in value, although we're looking at (hopefully) a reasonably long timeframe. And I'm not a big fan of debt, even short term.

 

[Flyfish1]

It would be hard for me to take a large chunk out of an IRA or a Roth. Just an emotional concept really - If it were me I would take a HELOC and pay it off via cash flow from assets. Or rent the property and pay back the HELOC.

 

[HarveyS]

Add a pledged asset loan to the list of options. Basically a loan using your investments as collateral.

 

[pb4uski]

It would be hard for me to take a large chunk out of an IRA or a Roth. Just an emotional concept really - If it were me I would take a HELOC and pay it off via cash flow from assets. Or rent the property and pay back the HELOC.

The more I think about it the more I like the HELOC because of the flexibility that it provides.