Financial Dilemma: Tap Into IRA for New Home?

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We are a couple & are 60.  Both working currently, healthy & plan on working for years to come.  Have an IRA with a financial company in the amount of $300K.  We are both contributing to our 401K's but only 2K currently in both. The issue is that we have been in foreclosure & appears the bank will not do a loan mod, so will have to move out in a few months & a short sale will ensue.  We also have a 2nd mortgage which we are current in. We are contemplating purchasing a townhouse for $180K cash & deplete the IRA.  Our monthly fees to include maintenance, HOA & insurance will be $500/month, but we will own it. Our financial advisor has suggested we simply rent & purchase in a few years with a mortgage as this will be devastating to our retirement fund.  We understand we will be paying taxes on the $180k of probably 20%.  Renting will be $1500/month & at a minimum will spend $36K in 2 years before any company will give us a mortgage loan. Any suggestions will greatly appreciated!  Thanks!!!

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I suspect they are probably close to par - they mentioned a second mortgage so they likely cashed out -- probably when h... (more)

RedWolfe01 (Aug. 14, 2016 @ 10:23p) |

OP has left the building?

Looking4morecents (Aug. 16, 2016 @ 9:09a) |

Waa OP didn't like us nor our suggestions. Waa.

zapjb (Aug. 16, 2016 @ 11:55a) |

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brettla said:   We understand we will be paying taxes on the $180k of probably 20%.
You may understand, but I don't.  Please explain where this extra $36K will go.

Other questions:

(1)  When you say you're going to use your IRA money to fund the purchase of the townhouse, is this a traditional, SEP, or Roth IRA?

(2)  Would you be borrowing from it or distributing from it?

(3)  What are you annual salaries?

(4)  Do you have any other sources of income?

DTASFAB said:   
brettla said:   We understand we will be paying taxes on the $180k of probably 20%.
You may understand, but I don't.  Please explain where this extra $36K will go.

 

$1500/mo for 2 years = $36k. 

OP - maybe you could start with the current property situation. your blending of "short sale" and "foreclosure" makes it unclear. we may have some other tips for you in your situation, to drag the process out, save costs, avoid a taxable short sale deficit, etc.

and i personally think you'll have a tough time getting a mortgage 2 years out from a foreclosure....but i've heard it's possible.

i also think a $180k property shouldnt have a $500/mo HOA unless the amenities are killer....but that's location-specific.

solarUS said:   $1500/mo for 2 years = $36k. 
I think I understand now... it's just coincidence that the figure is $36K for both items.  The $36K they'll pay in rent for 2 years at $1500/mo will only be incurred if they don't buy the townhouse.

The 20% taxes they'll pay on $180K (which also happens to be $36K) will go to pay regular federal/state income tax on the $216K traditional IRA distribution they'd have to take in order to buy the townhouse.  Seems 20% is a low estimate, but I'm no CPA.

DTASFAB said:   
brettla said:   We understand we will be paying taxes on the $180k of probably 20%.
You may understand, but I don't.  Please explain where this extra $36K will go.

Other questions:

(1)  When you say you're going to use your IRA money to fund the purchase of the townhouse, is this a traditional, SEP, or Roth IRA?

(2)  Would you be borrowing from it or distributing from it?

(3)  What are you annual salaries?

(4)  Do you have any other sources of income?

  

1. It's an IRA with Morgan and Stanley that was pension money that was put into an IRA. It is all market based. 
2. Distributing from it. 
3. ~$100k combined
4. No other sources of income. 

DTASFAB said:   
solarUS said:   $1500/mo for 2 years = $36k. 
I think I understand now... it's just coincidence that the figure is $36K for both items.  The $36K they'll pay in rent for 2 years at $1500/mo will only be incurred if they don't buy the townhouse.

The 20% taxes they'll pay on $180K (which also happens to be $36K) will go to pay regular federal/state income tax on the $216K traditional IRA distribution they'd have to take in order to buy the townhouse.  Seems 20% is a low estimate, but I'm no CPA.

  
Yes. The $36k is how much rent is at the new property for 2 years. My financial advisor said that it could potentially be 28% because of our tax bracket. 

We have two mortgages on the house adding up to ~$260,000. If we were to stay in the house, it would need about $40k of maintenance. My husband lost his job three years ago and we weren't able to make payments on the house, which has led to this current situation. 

If we do purchase another property, could the bank come after us and put a judgment against our new property?

Depends on what state you are in.

You can pay $36k in exchange for renting a place for 2 years, or pay $36k in taxes in exchange for a lower IRA balance and a $500/month bill. I would rent, especially since you're not that far away from being able to tap the IRA without penalties.

Rent, and rent cheap.
You don't need a $1500 a month place.
Time to downsize....

I think if you're pulling $180k out, you'll be in a higher tax bracket than 20%.

How much is your current house worth?

How much do you owe to get caught up on payments?

How much are the current payments?

May not happed given what you describe ... but check out a reverse mortgage. No monthly payment, but just might save IRA. I would hate to see you have to live later years on just social security. If something happens to one of you, the other will learn the hard way to live in poverty.
Do all you can to preserve your retirement funds for the long term instead of the short term.

Home ownership is overrated, which you can certainly see from your present circumstances.  If salvaging your current situation isn't possible (and you haven't presented enough details to really determine that), then move on and rent.  There's no reason to buy a house, now is there?

brettla said:   
We have two mortgages on the house adding up to ~$260,000. If we were to stay in the house, it would need about $40k of maintenance. My husband lost his job three years ago and we weren't able to make payments on the house, which has led to this current situation. 
 

what's the house worth?

"needs 40k in maintenance" yet you're living there now??? that doesnt make a ton of sense. maybe you mean has deferred maintenance, but why is that important?

tell us where you are in the foreclosure process, and if your home is for sale, short sale, how far behind you are, whether you've attempted a loan mod or HARP refi, etc....without that info, any advice you get is speculative.

This purchase has disaster written all over it. Here are three scenarios:

(1) Walk away from current home. Earn $100K/year combined, contributing as much of that as possible in new retirement money. I'll be conservative and assume you can't afford to put much in and also that your employers don't offer a plan, so $6500 each into regular IRAs. That leaves you with $87K combined income. At this combined income, your annual federal & state income taxes shouldn't be too bad, figure $20-25K tops, and probably less. Now you have $62K. You spend $18K/year on rent. This leaves you with $44K in earned cash flow income for other expenses or to be saved. All the time, your $300K in retirement money continues to grow untouched, plus you're adding to it. Depending on the cost of living in your state and your expected lifestyle, you can probably both retire comfortably well before age 70, with proper planning and assistance from a financial professional.

(2) You distribute approximately 80% of the $300K you have in traditional IRA money. You owe approximately $70K, maybe more, in fed/state income tax immediately for this $240K distribution. Your retirement account dwindles from $300K to a measly $60K. You still don't have enough to pay $180K for the townhouse in cash, so you take out a small mortgage, if you can get one, or you scrape the rest of the cash together by waiting a few months for your earned income to make up the difference or you borrow from family or whatever. There will be hidden costs upon purchasing the townhouse, and you should expect to spend more like $190K or maybe a little more, rather than the $180K asking price. You now have $180K in equity in a home that cost you over $250K when it's all said and done, not to mention the opportunity cost of not having that money invested in a tax-deferred account moving forward. Your carrying costs on the townhouse just for the HOA fee will be $12K/year, but that doesn't account for property taxes, insurance, utilities, and any potential repairs/upgrades that might be needed. Also, the HOA fee will go up almost every year, if not every year, just like everything else in this world. You'll be left with very little except your $100K/year combined salaries, and that means you have to continue to work indefinitely. And for what? So you can FEEL like you have something? You ALREADY have something - $300K in retirement money and decent jobs that will enable that nest egg to grow if you play your hand right.

(3) Try to figure out a way to catch up on the money you owe and keep the current house. Probably not the best idea since you'll probably want to downsize soon anyway, and even if you caught up on the late payments, your remaining mortgage debt in the house would still be gigantic.

OP I think this is a STUPID idea.

Concerns about bk, unknown transferred debts, recent law changes, jurisdiction of loan remedies, etc. etc.

Better to rent. Downsize as mentioned. Downsize so it hurts & is cheaper. You're less likely to repeat financial mistakes hopefully.

Wait a couple years.

Nothing better than the cash you have in the IRA (if conservatively invested) if the ____ REALLY hits the fan.

Rent. You cannot deplete your IRAs at age 60 and have much chance of saving more for retirement.

brettla said:   We have two mortgages on the house adding up to ~$260,000. If we were to stay in the house, it would need about $40k of maintenance. My husband lost his job three years ago and we weren't able to make payments on the house, which has led to this current situation. 
 

wait..."we weren't able to make payments" but you had access to a large 401k that you could borrow against? and now, making 100k you can't get current? were you planning a strategic default but then couldn't leave, or...?

how long did you not pay? how much to get current? man there is so much you aren't saying. this process is usually dicey and complicated. we offer a big resource that could benefit you greatly but not getting the whole story wastes everyone's time.

OP you're presenting this as a choice between two options, but plenty of other options exist.

What is the lowest cost place you can rent and feel safe in the neighborhood? This should be your true rental option, not the cost to rent the same level of a place you are looking at buying.

And the difference between renting this lowest cost option and your $500(!?) HOA and property taxes and insurance will probably be $0.

Sounds like you don't want to have to sacrifice or take a step backwards...but the solution to this problem is hard work and frugal living for a while.

So....
Odds on OP 4 posts & done.
I say 75%.

Why would you tap the IRA to buy a new home, but not to save your current home? A lot of missing info here. Is the home way upside down?

I suspect they are probably close to par - they mentioned a second mortgage so they likely cashed out -- probably when hubby lost his job 3 years back.

The other issue is I suspect they are empty nesters, have the house that is too big and they are either negative or very low equity. It also needs 40K in maintenance -- which is probably a roof, so its hard to sell except to flippers who want a lower price than the CV of the loan.

So part of this is a desire to get out from under the "anchor" that the old place is. Since they work they can't quite escape the area.

---

Given all this, I would stay in the house as long as possible and then plan to rent cheap. When you hit retirement (at whatever point you plan to file) then you move to someplace you can afford a much cheaper house than that townhouse. I am planning to have my condo paid off well before I retire, if things change after that I can always sell out and move -- just to NOT have this sort of thing happen. I went through a period of being effectively homeless (relatives and cheap weekly hotels) after losing a 100% travel job -- and I REALLY don't want that in my 60s.

OP has left the building?

Looking4morecents said:   OP has left the building?
  Waa OP didn't like us nor our suggestions. Waa.



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