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We have recently considered buying another property closer to family. Since selling our current home may take some time we were thinking we could possible use a retirement Roth account to come up with purchase price rather then take a bridge or other loan. We also do not have enough after tax money in regular accounts to cover the total purchase. We have been here for many years so it meets tax deduction for primary residence sale. I am thinking perhaps some other folks on this forum have considered this.
It seems like this may be a good solution to avoid borrowing money for some undetermined period and paying loan costs. This also does not raise taxable income as this Roth money has already been taxed and has been in place longer then 5 year. The money from the eventual sale of current property can then go back to replace monies used in the purchase of the new place. We also plan to do more Roth conversions into the future as planning suggests.
Are we missing something about this Roth use or is another way suggested to raise the money? I realize this does use some Roth money that is an advantageous account for growth but wondering what other items I may have missed.
One idea that maybe won’t work for you but might work for others is what’s called a box spread— four options trades that together result in effectively a loan against the market at close to treasury rates. I don’t think you can trade options against an IRA though, so you would need assets in a taxable account. You wouldn’t have to sell the assets in the taxable account, but you would need assets in a taxable account.
Another option to consider, if you have a brokerage account, is a security backed line of credit. This is similar to a HELOC, but using your brokerage account as collateral. Schwab has been offering this for 15+ years while Fidelity started recently. This option could be in conjunction with withdrawals from your Roth. The interest rate is higher than a HELOC but lower than a personal loan. Your income is generally not an issue.
You’re facing a dilemma that many will face. If you want to buy a place before selling your old place, it’s all going to come down to cash flow. In your case, (1) you don’t have the funds in a taxable account to purchase the new house outright; (2) you don’t have the funds in a taxable account for an SBLOC; (3) you probably won’t be able to get enough from a HELOC although you didn’t mention specific amounts; (4) you probably won’t qualify for a bridge loan if you’re retired without work income although you should look into it; (5) you can’t replace the money in the Roth unless it’s very short-term and you mentioned it might “take a while” to sell your current place. Given all of that, you’d probably be better off renting in the new area, selling your current home, and then using the proceeds to buy another home. I don’t see how your cash flow is sufficient otherwise based on what you’ve described.
Why not open a self-directed Roth and rollover an amount equal to purchase price and closing costs of the new home into the self-directed Roth, then go buy the new home in the Roth? This would preserve the Roth “investment” as once you withdraw it, the tax-free compounder is gone forever. At least this way, the Roth grows as your home appreciates, and if you ever turned it into a rental, tax-free rental income. Just a creative thought.
I believe the personal use would be deemed a prohibited transaction and the entire Roth IRA would be deemed terminated and fully distributed in the year the personal use first occurs.
One thing I’d check is whether the home-sale proceeds can actually be put back into the Roth. Unless the 60-day rollover rule applies, I believe that Roth space is permanently lost.
That said, I’m not sure preserving the Roth is automatically the right answer either. If the alternative is holding highly appreciated taxable assets for heirs, those may receive a step-up in basis at death, potentially making that growth effectively income-tax-free as well.
I’d compare the actual borrowing cost against the value of preserving the Roth, the embedded gains in taxable assets, and the estate plan rather than assuming the Roth should never be touched.
How about renting near your family until your house sells.
Renting also provides some safeguards in the event the key family members you are moving to be nearer to later have to move themself, or if you find you do not like some or many aspects of where you are moving to such as losing relationships in long term medical, professional, church or friends or if the change adversely disrupts your major planning for taxes, retirement security or medical insurance.
I recommend HELOC or bridge loan for financing. My preference is to keep Roth in fairly aggressive investment matching your risk tolerance, as that is the last one that I would cash.
I’m assuming you’re retired, and income verification for a loan may be challenging with some lenders for a HELOC or bridge loan. A thought might be to see if the institution where you hold your retirement accounts may offer securities lending. I would only leverage up to or around 50% of the assets you may secure the loan with (assuming you are paying the loan back in the near future when selling the property you are in?). It’s my understanding the institution could liquidate assets should there be a market correction of some sort. I’ve been meaning to look into a LOC from my institution since my HELOC recently expired.
I’d be hesitant to liquidate the Roth IRA given it’s tax benefits, but life is short, and if it’s the only option to get you to your goal of spending more time with your family, might be worth considering. Question- what % of your Roth are you liquidating? Some folks hold large Roths, and maybe your thought isn’t so bad…
Bill,
As I have written before I have planned for some time to tear down our deck and replace it with a three season porch when we both turn 70 and claim our maximum benefits. This is so we can get a HELOC in order to pay half of the cost, with the other half coming from our brokerage account. This arrangement will avoid spiking our income in the year we build and take out a large withdrawl from my traditional account. Then the HELOC will be paid off within a few years.
Your comment though got me worried about this long term plan. I used AI to see if our financial status would qualify us for a HELOC. It asked for some financial information which I provided. Based on on our Social Security income, my small pension, our home’s assessed value/equity (it’s paid off), our overall debt (none), and our portfolio balance AI said obtaining a HELOC should be no problem, WHEW!
That’s great! I worked in banking as a lender for several decades, and it was challenging for some retirees to sometimes obtain financing for loan requests due to living on a lower income than working years. I think the OP would need a fairly large loan for a home purchase (rather than a modest HELOC), which was why I thought a securities loan could be an option. Anyways, good luck with your project in the future!
Like DrLefty I’d also be wary and would probably take out a loan before raiding the Roth. I also agree with her that it depends on one’s own situation.
You might start withdrawing from your Traditional accounts to build up cash in your taxable account for a purchase. You could withdraw some this year and some more next year for the same tax it would have cost you to convert that amount to Roth.
I would probably take a loan for a short time to bridge the gap between your purchase of the new place and your sale. In fact, we just did this—we had a HELOC set up on our previous place, which we maxed out for the new purchase and then, when our old place sold, the HELOC was paid off. It depends on the timing, but I think the total cost in interest was under $400 for us.
I’d be wary of giving up the tax-free advantages of the money in the Roth. You can’t just “put it back” when you sell your current home. But it also depends on your financial big picture and how you might use those Roth funds in the future.
I am not buying now but had also considered the Roth cashout to fund a new house – but the HELOC is a great idea I had not considered. When the time comes I will definitely look into into this – thanx.
I have also considered an “asset based mortgage” as others have mentioned.
I had set up the HELOC a few months before I retired and hadn’t touched it. It was great to have it available when the opportunity to buy our new home suddenly arose.
It’s smart that you set it up before you retired. Once you have retired, it can be very difficult to qualify for a HELOC even if your home is completely paid off.
I agree. It’s really hard to say with the very limited info you provided. But I’d be very reluctant to give up the Roths.
HD community – any thoughts?