Paying for new House with Roth or 401K?

[Mike93]

Hi,

I'm considering buying a house and then selling my old one.
Flood factor rezoned my house as a dismal situation so I
want to move. Yay.
I can pay for it cash with a Roth, or a 401k. Both have about
300k in each.

I am 60 and have no debt at this time. I know I'll get
hit with 20% withholding on the 401k, but no tax
on the Roth.

I could also sell stocks in taxable accounts. I think I have
to acquire enough capital gains to make my adjusted gross income
over 40K in order to have to pay 15% capital gains tax.

If I bought the house, it would reduce my total investments
to about 1.1M, until I sell the old house. Probably get
about 200k for it. Maybe less, it needs some work.
I still work part time and make about 27K a year gross.

My concern is, is it worth it to save the tax amount and
sacrifice the Roth at 60yrs of age? I feel stuck on this
decision.

One idea I am leaning toward is to sell about 220K of the Roth,
keeping a little left in there, and then selling about 80K
of stocks and paying 15% capital gains tax. That would
leave some in the Roth.

I'm planning to call H.R. Block and T.Rowe Price and see
if they have any advice. If you guys also have any ideas, I'm interested.

Thanks,

Mike

 

[fosterscik]

We faced a similar decision when we built a new house 2 years ago. Our decision: get a 30 year mortgage and pay off the new house over time from our taxable and tax deferred money. The tax hit to pay using a 401k or IRA would have been very large (as it will be for you). Like you we wanted to preserve our Roth funds.
When our old house sold we added the proceeds to our taxable brokerage account rather than paying off the mortgage. Loan rates were/are so good then/now that it made no sense to pay down a 2.875% loan. In that way we can spread the tax deferred withdrawals out and avoid most of the tax hit.

We had no trouble getting a mortgage (20% down to avoid PMI) without a regular source of income. Just set up a fixed monthly transfer from your 401k to a checking account and the mortgage company will consider it a "paycheck". Good luck!

 

[RunningBum]

Just to clear up a couple of things you said. You may know all this and just misstated it.

Withholding on a 401K withdrawal has nothing to do with how much you'll actually be taxed.

You don't pay tax on the entire value of the stocks you sell, but only on the gains. Also, the 15% capital gains tax may not apply to the entire capital gain. Some of it may still be at 0%.

You may be able to select holdings and even shares within the holdings that have a relatively high cost basis to minimize the capital gains you'd pay.

An important factor about withdrawing from your 401K is what your marginal tax rate is now vs. what it will be when you start withdrawals later when SS and RMDs hit or you plan to tap it for living expenses. I don't think you want to withdraw the entire amount from your 401K, but you might be able to take a little at a lower tax rate.

I think there may be an option to withdraw from your 401K and/or Roth and put the money back within 60(?) days? Hopefully someone who knows better can look this up, or you can google or ask your tax guy. If you are able to sell your existing house quickly enough that you can replace the withdrawals, that seems like a good idea. But you probably can't count on that.

So I would first look at selling any stocks from taxable that have a relatively high basis to limit the amount of LTCGs.

If you still need cash then consider taking some out of your 401K if it makes tax sense to take now vs. later. A drawback to this is that more regular income from 401K withdrawals will push more of your LTCGs into being taxed so if your marginal tax rate is 12%, the effect of a withdrawal is a 27% tax: 12% on the regular income plus 15% on an equivalent amount of LTCGs that became taxable. So maybe you don't want to do a withdrawal at all.

If you have an HSA balance, pull as much of it as you can that you have medical receipts to make a tax-free withdrawal.

Finally, pull the rest needed from your Roth.

So it may turn out to be just as you suggested, some from the Roth and some from taxable. I'm just trying to give some guidelines on how much you should take from each.

I'd be surprised if TRowe gives you tax advice, same with H&RB unless you have some special relationship with either. You may want to hire a tax specialist for advice if you aren't able to figure this out on your own. The issue there is that the tax specialist's fees may eat up any savings they find for you.

 

[RunningBum]

I overlooked the best answer, which foster gave. Get a mortgage. At these low rates and you not having money easily accessible, this is probably the best solution.

 

[pb4uski]

....I could also sell stocks in taxable accounts. I think I have
to acquire enough capital gains to make my adjusted gross income
over 40K in order to have to pay 15% capital gains tax. ...

So essentially, you need a loan to bridge you from when you buy the new house to when you sell your current house, right?

I would think that you could get a loan using your taxable account securites as collateral and then pay off the collateral loan from the proceeds of the sale for the house. Or you might be able to do it with a margin loan from your broker using your taxable account as collateral.

No tax impact at all and you get to keep the money in the tax-free Roth.

The 60 day tIRA or Roth withdrawal and redeposit would work but I wouldn't chance it if a margin loan or collateralized loan would work.

... That borrowed money is called a margin loan, and it can be used to purchase additional securities or to meet short-term lending needs not related to investing. Each brokerage firm can define, within certain guidelines, which stocks, bonds and mutual funds are marginable. ...

 

[Mike93]

Thanks for the advice. I'm a little wary of getting a mortgage at 60. Maybe it's
all those Ramsey radio shows I've listened to in the past. But I see the advantage
of doing the mortgage. That method carries risk of the market keeping strong,
and I'm sure a dip will occur eventually. If I sell stocks while stocks are high,
it helps counter the real estate being high. Hopefully.

I'm leaning toward selling stocks that have a low profit in taxable accounts, and then
taking maybe a 1/3 of the Roth out. That way I would get some LTCG tax on top of
regular income tax from my job.
The 401k at Fidelity is growing better than my other investments, so after
thinking about it I'm hesitant to withdraw from that one. I don't like touching the Roth, but as far as risk angle goes, it fits so far.

Unless I sold to a wholesaler, I don't think I could get the old house ready to sell in 60 days. I've gotten many letters from those guys. I'm sure they just probably offer 60% of what you want .
I will push on and get the pencil and paper out. Thanks again for the feedback.


Mike

 

[pb4uski]

Thanks for the advice. I'm a little wary of getting a mortgage at 60. Maybe it's
all those Ramsey radio shows I've listened to in the past. But I see the advantage
of doing the mortgage. That method carries risk of the market keeping strong,
and I'm sure a dip will occur eventually. If I sell stocks while stocks are high,
it helps counter the real estate being high. Hopefully.

I'm leaning toward selling stocks that have a low profit in taxable accounts, and then
taking maybe a 1/3 of the Roth out. That way I would get some LTCG tax on top of
regular income tax from my job.
The 401k at Fidelity is growing better than my other investments, so after
thinking about it I'm hesitant to withdraw from that one. I don't like touching the Roth, but as far as risk angle goes, it fits so far.

Unless I sold to a wholesaler, I don't think I could get the old house ready to sell in 60 days. I've gotten many letters from those guys. I'm sure they just probably offer 60% of what you want .
I will push on and get the pencil and paper out. Thanks again for the feedback.


Mike

If you go with a mortgage, you don't have to keep the mortgage... once you sell the old home you can payoff the mortgage or make a large paydown... in that case, any mortgage origination costs are just a cost of avoiding having to sell taxable account securities or take money out oyour tax-free Roth.

Wouldn't the investment/ticker that you seem to like in your 401(k) also be available to you in your Roth?

This may be a longshot, but back in 1986 we were buying a new house and our old house was under contract but the closing of the old home was delayed... so the deal wouldn't crater the real estate broker (who was both listing and selling broker) offered me a bridge loan for the 30 days or so that I needed and I took it. Do you think that the seller might accept a large downpayment (from taxable sale proceeds) and a 90 day note for the remainder?

 

[retire-early]

We faced a similar decision when we built a new house 2 years ago. Our decision: get a 30 year mortgage and pay off the new house over time from our taxable and tax deferred money. The tax hit to pay using a 401k or IRA would have been very large (as it will be for you). Like you we wanted to preserve our Roth funds.
When our old house sold we added the proceeds to our taxable brokerage account rather than paying off the mortgage. Loan rates were/are so good then/now that it made no sense to pay down a 2.875% loan. In that way we can spread the tax deferred withdrawals out and avoid most of the tax hit.

We had no trouble getting a mortgage (20% down to avoid PMI) without a regular source of income. Just set up a fixed monthly transfer from your 401k to a checking account and the mortgage company will consider it a "paycheck". Good luck!

Can you explain a bit more about a fixed monthly transfer from the 401k?

The problem for me is that I rolled over all of my 401k money to an IRA whenever I left an employer.

Also, how far in advance did you start doing the transfer before applying for the mortgage? Do they want to see 12 months worth of bank statements?

Thanks.

 

[fosterscik]

Can you explain a bit more about a fixed monthly transfer from the 401k?

The problem for me is that I rolled over all of my 401k money to an IRA whenever I left an employer.

Also, how far in advance did you start doing the transfer before applying for the mortgage? Do they want to see 12 months worth of bank statements?

Thanks.

A fixed transfer will work equally well from an IRA (actually what I did). I set up a monthly transfer from Vanguard to my Schwab checking account. The mortgage company accepted this as regular income. My mortgage company required 3 months of bank and IRA statements showing the source of the transfers and where it was going. I had to supply statements showing all our assets and a tax return. I had no problems getting the loan (I was older than you and was fully retired).

 

[retire-early]

A fixed transfer will work equally well from an IRA (actually what I did). I set up a monthly transfer from Vanguard to my Schwab checking account. The mortgage company accepted this as regular income. My mortgage company required 3 months of bank and IRA statements showing the source of the transfers and where it was going. I had to supply statements showing all our assets and a tax return. I had no problems getting the loan (I was older than you and was fully retired).

Thank you.
It looks like I am too young to be able to make tax-free withdrawls.

 

[Mike93]

After going over several combinations of selling securities,
steam coming out of my ears, I found that I have a significant
amount of cash [70k] in one of my stock accounts. It was
sitting there and I should have invested it long ago. But it
allows me to avoid the whole Roth idea. However, I am going
to get hit with some significant LTCG and maybe a few short ones.

Since I'm part time, and only capital gains will contribute
to my income, I think I will be below the 22% mark. I'll
have to sell approximately 198K of stocks on an
individual account, with a few losses to hopefully balance out
the tax. I hope I'm right about the capital gains and
adjusted gross income sum. Thanks for the mortgage
idea I will mention it to my realtor.

I have a suspicion I'm buying 6 months before the prices go down, but
there's not a lot of inventory where I'm shopping. Basically I've talked
myself into this by realizing taking stock money and putting it into
real estate is just diversification. Both are high, so it should balance out.

 

[pb4uski]

... I have a suspicion I'm buying 6 months before the prices go down, but
there's not a lot of inventory where I'm shopping. Basically I've talked
myself into this by realizing taking stock money and putting it into
real estate is just diversification. Both are high, so it should balance out.

Oh, that makes sense. Maybe not.

 

[latexman]

In 2018, we downsized. Mortgaged the new house with 20% down. Sold the old house. Injected the proceeds from the old house mortgage into the new house mortgage. The new mortgage was recast for a much lower payment. Our lender knew all this was going to happen from day one, and it was easy.