OT: AKB aka My Family, need finacial advice for best way to access cash.

[NedFromYork]

Without getting in to details, need to access about $500k in cash to purchase a primary residence for my son and I. I have about $425k in a brokerage account in investments, with a cost basis of about $210k. I have $25k in a money market account, I can get $42k from my 401k at about 4.5% payback interest to myself, I have about $1.5M in a Rollover IRA. I prefer not to have a mortgage because I do not have one now so I prefer to purchase home outright but I guess it is a possibility I can just put 20% down cash and just payback a mortgage quickly.

Thoughts on best approach?

 

[Agoodnap]

Without getting in to details, need to access about $500k in cash to purchase a primary residence for my son and I. I have about $425k in a brokerage account in investments, with a cost basis of about $210k. I have $25k in a money market account, I can get $42k from my 401k at about 4.5% payback interest to myself, I have about $1.5M in a Rollover IRA. I prefer not to have a mortgage because I do not have one now so I prefer to purchase home outright but I guess it is a possibility I can just put 20% down cash and just payback a mortgage quickly.

Thoughts on best approach?

What is your age?

 

[NedFromYork]

What is your age?

49. Any mortgage would probably be a 5/1 ARM as I expect to pay it off in that time period but prefer not to have a mortgage.

 

[LioninNC]

Looks to me like you are going to have a huge tax event regardless of which investment you tap to fund the house purchase if you don't want a mortgage. Tapping the brokerage account is probably your cheapest option tax wise as that is a cash out of $425K with about half, $215K, being taxable. As I understand it, anything you take out of either IRA will be fully taxable and due to your age, you will also pay a 10% penalty (possibly minus a $10K exception if you haven't owned a home in 2 years or this is your first home) on the withdrawal.

So if you are committed to not having a mortgage, liquidate the brokerage account, then pull out as much of the IRA to purchase the house, plus money to pay the taxes and penalties. Given the 10% penalty of the IRA withdrawals, it might be best to get a mortgage for 10 years to get you to 59 1/2 when you can withdraw from the IRA without the penalty. The good news is that you have enough seed to buy the house outright, but the bad news is that with the bulk of your funds are in yet to be taxed status, you don't have a lot of good options without paying Uncle Sam a bundle.

 

[dontgojoepa]

Mortgage rates are in the low 2's right now, depending on your credit score. It's practically free money. The taxes and lost interest from tapping your brokerage accounts will be a bigger hit than the 2ish% you'll pay toward a mortgage. Particularly if you plan to pay it off in 5 years. Seems like a no-brainer.

 

[NedFromYork]

Thanks NC. Yes, dont, beginning to think the same.

Does anybody have a guy licensed for NH for a non-VA ARM?

 

[Pardlion]

Rent a place for a year and buy when the RE market crashes.

 

[PSULionsDub]

Get the mortgage for the home based on where interest rates are now. Do not sell your brokerage account because you will pay taxes on the capital gains. A loan from your retirement will be paid back with after-tax dollars so that's not good financial planning. Lastly, if you cash out everything you have now in order to purchase the home in full with cash, then what happens if there is a big problem or flood at the home in several months to a year? You may not have the cash on hand to fund an emergency fund.

 

[PSUSignore]

It's a good time to get a mortgage given interest rates (~2-3%) are lower than historical average annual investment returns (often estimated at ~7% after inflation). Financially, the numbers will tell you to borrow as much money for the mortgage as possible and keep your savings invested. The fees and taxes you will pay on accessing retirement accounts early will only strengthen the case for getting a mortgage.

 

[bdgan]

Rent a place for a year and buy when the RE market crashes.

I wouldn't predict a crash but I definitely agree that pricing is at a high.

 

[PSU Mike]

Like you, Ned, but way more than I needed to know in here.

 

[bdgan]

Without getting in to details, need to access about $500k in cash to purchase a primary residence for my son and I. I have about $425k in a brokerage account in investments, with a cost basis of about $210k. I have $25k in a money market account, I can get $42k from my 401k at about 4.5% payback interest to myself, I have about $1.5M in a Rollover IRA. I prefer not to have a mortgage because I do not have one now so I prefer to purchase home outright but I guess it is a possibility I can just put 20% down cash and just payback a mortgage quickly.

Thoughts on best approach?

$425k with a cost basis of $210k means a $215k capital gain all in one year. The tax would be approximately $45k depending on your state so you're only getting $380 in cash.

I assume your 401K money would be a loan that you would repay to yourself. I don't like those because it derails your retirement savings and also because of the tax implications. Loan repayments are made with income that was already taxed and again when you take those payments out as a distribution at retirement. One other thing... if you lose your job you could be forced to repay your 401K loan immediately. JMO.

You certainly don't want to pay a penalty for a withdrawal from your 401-K.

A mortgage might be best. The good news is that interest rates are low but keep in mind that there are many costs in addition to the actual interest. Legal, inspection, transfer taxes, application costs, and other fees. I also think home prices are high right now because of the low interest rates.

I assume you are purchasing this home for your son because he can't afford to do it on his own. If that's the case I would encourage you to consider a more modestly priced residence (or townhouse) if possible.

 

[Agoodnap]

Not knowing (don't tell) your income and job security makes it hard to give good advice.

With the current mortgage rates you should strongly reconsider your position. However, to answer your question, the only way you'll not have a mortgage is to withdraw about $240k from the ira with the 10% penalty which should net you about $150K. From the brokerage account you'll net about $360k ($210 basis + ($215*0.7)) assuming 30% tax so you'll need that $150k from the ira transaction to cover the $500k purchase. Other combinations of withdrawals should be considered.

Some other thoughts:

Leave at least $100k of the brokerage account behind for unforeseen events.

Consider an ira withdrawal using SEPP (Substantially Equal Periodic Payments) to avoid the 10% penalty. Call the brokerage house that holds your ira and ask them for the three potential amounts. You'd have to continue the withdrawals until age 59 1/2 per rules and pay taxes but no penalties. You'd probably have to take about $43k per year, but if you made your son the beneficiary this could be less. Worth checking out.

Interrupting your retirement investments is a bad idea...at least in my world.

Will your son be attending college? Having money in the non-retirement brokerage account will work against any financial aid he may receive.

 

[PSU Mike]

I’ve always felt people are too emotionally attached to the concept of owning a property free and clear, particularly when rates are so low.

 

[fastlax16]

I’ve always felt people are too emotionally attached to the concept of owning a property free and clear, particularly when rates are so low.

Some people don't understand good debt vs bad debt.

 

[PSU Mike]

Some people don't understand good debt vs bad debt.

Me?

 

[Ward Hog]

Get a 30 year mortgage. The rates are exceedingly low, you save a bundle on tax, you keep your investments and grow at least 2 times the interest rate, tax write off of interest, pay off when you turn 59 1/2 and can access retirement $ tax free. You also keep money for other things.

 

[fastlax16]

Me?

No?...

 

[sluggo72]

Get a 30 year mortgage. The rates are exceedingly low, you save a bundle on tax, you keep your investments and grow at least 2 times the interest rate, tax write off of interest, pay off when you turn 59 1/2 and can access retirement $ tax free. You also keep money for other things.

I never understood people need to be debt free especially when you have the money to pay the debit. In this interest rate environment you are crazy not to borrow money, especially with mortgage rates so low. Add in adding $215, 000 to your AGI you have to pay tax on, well you get the idea.

 

[NatLion]

Mortgage is a no brainer here -- the longer the better. Any other way is far more expensive after tax.

 

[1PSUfootball1]

Rent a place for a year and buy when the RE market crashes.

That's the spirit!

 

[SLUPSU]

Without getting in to details, need to access about $500k in cash to purchase a primary residence for my son and I. I have about $425k in a brokerage account in investments, with a cost basis of about $210k. I have $25k in a money market account, I can get $42k from my 401k at about 4.5% payback interest to myself, I have about $1.5M in a Rollover IRA. I prefer not to have a mortgage because I do not have one now so I prefer to purchase home outright but I guess it is a possibility I can just put 20% down cash and just payback a mortgage quickly.

Thoughts on best approach?

Without getting into the weeds in detail and keeping it simple, if you get a 2.25%, 15 yr, $400k loan you'll pay about $70k in interest over 15 years. If you take $400k out of your investments you'll lose $445k in earnings over 15 years if you're earning 5% on your money.

 

[Sharkies]

Without getting into the weeds in detail and keeping it simple, if you get a 2.25%, 15 yr loan you'll pay about $70k in interest over 15 years. If you take $400k out of your investments you'll lose $445k in earnings over 15 years if you're earning 5% on your money.

This - exactly this right here.

 

[Pardlion]

That's the spirit!

I've seen this movie before.

 

[LafayetteBear]

NedfromYork: I agree that going the mortgage route is the safest and easiest alternative, but if you truly do not want to do that and don't want to pull money out of your rollover IRA and pay a wad of taxes as a result of the withdrawal, I was going to suggest using your IRA to invest in real estate.

This strategy may not be workable either, given the restrictions on using an IRA to invest in real estate, but it is something to at least look at. You need to have a self directed IRA in order to do it. (Perhaps you can roll over some of your current $1.5 million IRA into a separate self directed IRA for this purpose?) And you generally have to pay all cash for the purchase of the real estate. Another pertinent restriction is that the real estate purchase must be purely for investment purposes. My recollection is that neither the IRA participant (i.e., you) nor members of your family may reside in the purchased real estate.

But perhaps if you (in your capacity as Custodian of your self directed IRA) rent the residence to your son at a FMV rent, you may be able to get around that restriction. (If he's paying a fair market rent, it seems to me that the investment purpose requirement for an IRA purchasing real estate should be satisfied.) I'm not certain of that, however, Perhaps someone on this Board who is more deeply versed in IRA rules may be able to provide information on that issue.

 

[sluggo72]

NedfromYork: I agree that going the mortgage route is the safest and easiest alternative, but if you truly do not want to do that and don't want to pull money out of your rollover IRA and pay a wad of taxes as a result of the withdrawal, I was going to suggest using your IRA to invest in real estate.

This strategy may not be workable either, given the restrictions on using an IRA to invest in real estate, but it is something to at least look at. You need to have a self directed IRA in order to do it. (Perhaps you can roll over some of your current $1.5 million IRA into a separate self directed IRA for this purpose?) And you generally have to pay all cash for the purchase of the real estate. Another pertinent restriction is that the real estate purchase must be purely for investment purposes. My recollection is that neither the IRA participant (i.e., you) nor members of your family may reside in the purchased real estate.

But perhaps if you (in your capacity as Custodian of your self directed IRA) rent the residence to your son at a FMV rent, you may be able to get around that restriction. (If he's paying a fair market rent, it seems to me that the investment purpose requirement for an IRA purchasing real estate should be satisfied.) I'm not certain of that, however, Perhaps someone on this Board who is more deeply versed in IRA rules may be able to provide information on that issue.

dont go down the rental property in an IRA road asking no begging for trouble....

When IRA-owned property is held for rent, the management of the rental property must be structured such that rental income is received by the IRA and expenses are paid by the IRA. The IRA owner and other disqualified persons (e.g. IRA owner, spouse, etc.) cannot personally be the “middle man” by paying expenses personally or by collecting the rent in their personal account and then forwarding the funds to the IRA. There are essentially three different methods whereby the IRA may be structured to properly collect rent and pay expenses.

Regardless of the method used to own and manage the IRA owned rental property, the property cannot be leased to a disqualified person. So, for example, the IRA cannot purchase a property and allow the IRA owner’s son to lease the property as that lease would be a transaction with a disqualified person which results in a prohibited transaction.

Three Methods to Manage the Property​

1. Manage directly through the IRA. Money goes to the IRA custodian and expenses are paid by the custodian at the direction of the IRA owner.

2. Property Manager. The IRA hires a property manager who manages the property and receives the income and pays property expenses. Cash flow is returned to the IRA.

3. IRA/LLC. Under the IRA/LLC, the IRA owner is the manager of the IRA/LLC and receives income and pays expenses from an IRA/LLC checking account. The IRA/LLC structure is very common in IRA owned real estate investments. Managing a Rental Property Owned by Your Self-Directed IRA There are many different ways to manage an IRA-owned rental property. But, to properly manage the property, be sure to implement one of these three methods. sdirahandbook.com too much potential for 'self dealing'.

 

[nittanyfan333]

Without getting into the weeds in detail and keeping it simple, if you get a 2.25%, 15 yr, $400k loan you'll pay about $70k in interest over 15 years. If you take $400k out of your investments you'll lose $445k in earnings over 15 years if you're earning 5% on your money.

yahtzee. i've come to realize that when it comes to money, it's all a big math problem. lose 70k in interest or 445k in earnings. plus you have the ability to pay off your house in 10 years (5 years early) without paying penalty. yeah, hate having a mortgage if you don't have to, but IMO I'm ok having a mortgage while i've got income. Once I retire, I don't want to have one, so i'd rather pay a low rate now but put as much as possible into retirement accounts to earn interest then be able to take out $ penalty free after it's earned interest.

 

[Ranger Dan]

With interest rates now it’s a no brained to get a mortgage

 

[IANit]

Without getting in to details, need to access about $500k in cash to purchase a primary residence for my son and I. I have about $425k in a brokerage account in investments, with a cost basis of about $210k. I have $25k in a money market account, I can get $42k from my 401k at about 4.5% payback interest to myself, I have about $1.5M in a Rollover IRA. I prefer not to have a mortgage because I do not have one now so I prefer to purchase home outright but I guess it is a possibility I can just put 20% down cash and just payback a mortgage quickly.

Thoughts on best approach?

I'm curious where the $500k figure comes from. Have you already picked the place, or is that the going rate where you plan to live for the style you're accustomed to? Is this a school-related or sport-related thing for your son that will be short-term in nature? Or is this the new normal? How inflated are prices where you're buying if the market corrects itself? Can you handle having a good chunk of the $500k tied up until the house value recovers if that happens? Lots of questions here. It seems like your tax hit would be significant and there might be other non-monetary considerations in play that could make you regret the purchase in a year or two if you can't undo it easily. Even realtor commissions can eat up a lot in that price range. I'd consider renting if possible or going with a mortgage if you buy before liquidating any investment accounts.

 

[OhHello]

Like you, Ned, but way more than I needed to know in here.

I don't understand why he didn't share the account usernames and passwords? How are we to help without that info?

JK, but seriously. Don't put down more than 20% and take advantage of the ridiculously low mortgage rates and leave your investments mostly alone. The opportunity cost and the tax bill would be ridiculous to buy the house outright.

 

[PineIslandLion]

Many have said the same, but you need to seriously consider taking out a mortgage. For a 15 year mortgage, you’ll likely get a rate at 2% level. The math is quite simple… are you comfortable you can make at least 2% on the $ you keep in investment accounts over this duration? If you’re not comfortable with this answer, then you need to revisit your investment strategy.

 

[OhHello]

Many have said the same, but you need to seriously consider taking out a mortgage. For a 15 year mortgage, you’ll likely get a rate at 2% level. The math is quite simple… are you comfortable you can make at least 2% on the $ you keep in investment accounts over this duration? If you’re not comfortable with this answer, then you need to revisit your investment strategy.

Additionally, the tax burden when drawing down accounts will be much less if spread out over not just one year.

 

[PSUSignore]

Consider an ira withdrawal using SEPP (Substantially Equal Periodic Payments) to avoid the 10% penalty. Call the brokerage house that holds your ira and ask them for the three potential amounts. You'd have to continue the withdrawals until age 59 1/2 per rules and pay taxes but no penalties. You'd probably have to take about $43k per year, but if you made your son the beneficiary this could be less. Worth checking out.

This can be done to save IRA penalties, but OP should tread carefully. I've read that SEPP / 72T distributions can be slightly tricky to set up, and that the penalties can be very steep if done incorrectly. Setting up 72T distributions is one of the rare scenarios where I see recommendations to hire a financial advisor or tax professional to make sure it gets done the right way. A 5 year Roth conversion ladder seems safer and more common, but it requires a 5 year wait to access the converted funds.

 

[Agoodnap]

This can be done to save IRA penalties, but OP should tread carefully. I've read that SEPP / 72T distributions can be slightly tricky to set up, and that the penalties can be very steep if done incorrectly. Setting up 72T distributions is one of the rare scenarios where I see recommendations to hire a financial advisor or tax professional to make sure it gets done the right way. A 5 year Roth conversion ladder seems safer and more common, but it requires a 5 year wait to access the converted funds.

Hence is why I said, and I quote: "Call the brokerage house that holds your ira and ask them for the three potential amounts." These distributions aren't really "tricky", but you if you aren't experienced you need to talk to people that are experienced. In fact you MUST setup an SEPP through either your Finanacial Advisor or your Brokerage Firm who will assign you a Financial Advisor for this purpose. No other way to get it done. Your brokerage firm, assuming it not Robinhood, will help you get it right. However, you may also have seen that I said "Interrupting your retirement investments is a bad idea...at least in my world." Without more information, he should take a mortgage.

 

[PSUSignore]

Some people don't understand good debt vs bad debt.

On the other hand, some people just prefer the peace of mind of no debt regardless of what the math says. There's no one size fits all answer, it all depends on what each individual is comfortable with.

 

[BW Lion]

I can prolly help you out. Just email me at jgwentworth.com

 

[NedFromYork]

Thanks everyone. I'm going with 20% down and 15 year fixed for the rest with faster pay down. Market here is inflated, limited, quirky, rentals are non-existent. Thanks again.

 

[LafayetteBear]

dont go down the rental property in an IRA road asking no begging for trouble....

When IRA-owned property is held for rent, the management of the rental property must be structured such that rental income is received by the IRA and expenses are paid by the IRA. The IRA owner and other disqualified persons (e.g. IRA owner, spouse, etc.) cannot personally be the “middle man” by paying expenses personally or by collecting the rent in their personal account and then forwarding the funds to the IRA. There are essentially three different methods whereby the IRA may be structured to properly collect rent and pay expenses.

Regardless of the method used to own and manage the IRA owned rental property, the property cannot be leased to a disqualified person. So, for example, the IRA cannot purchase a property and allow the IRA owner’s son to lease the property as that lease would be a transaction with a disqualified person which results in a prohibited transaction.

Three Methods to Manage the Property​

1. Manage directly through the IRA. Money goes to the IRA custodian and expenses are paid by the custodian at the direction of the IRA owner.

2. Property Manager. The IRA hires a property manager who manages the property and receives the income and pays property expenses. Cash flow is returned to the IRA.

3. IRA/LLC. Under the IRA/LLC, the IRA owner is the manager of the IRA/LLC and receives income and pays expenses from an IRA/LLC checking account. The IRA/LLC structure is very common in IRA owned real estate investments. Managing a Rental Property Owned by Your Self-Directed IRA There are many different ways to manage an IRA-owned rental property. But, to properly manage the property, be sure to implement one of these three methods. sdirahandbook.com too much potential for 'self dealing'.

Thanks for this, sluggo. IRA rules and regulations are not within my specialty area, so I hazarded a guess that the son's paying a fair market value rent might work, but you have indicated that there is a bright line test precluding renting the IRA-owned real estate to a disqualified person regardless of the whether the rental is a fair market rental. so this strategy will not work for the OP.

 

[fastlax16]

On the other hand, some people just prefer the peace of mind of no debt regardless of what the math says. There's no one size fits all answer, it all depends on what each individual is comfortable with.

And I’d say those people are the people who don’t understand good debt vs bad.

 

[OhHello]

This can be done to save IRA penalties, but OP should tread carefully. I've read that SEPP / 72T distributions can be slightly tricky to set up, and that the penalties can be very steep if done incorrectly. Setting up 72T distributions is one of the rare scenarios where I see recommendations to hire a financial advisor or tax professional to make sure it gets done the right way. A 5 year Roth conversion ladder seems safer and more common, but it requires a 5 year wait to access the converted funds.

Yes, would not recommend this route. Tricky is an understatement. The withdrawals must be to the penny correct or penalty.

The best move here is definitely to put only 20% down and then take advantage of historically low mortgage rates that are less than half of last month's reported inflation number. This is free money and this route doesn't have damaging penalties or tax consequences of many of the others being discussed here. Plus there is an opportunity cost for not having hundreds of thousands making even a very conservative return.