Quote:
Originally Posted by faydra
Husband is 66 and I am 59 and we live in California. My family lives in B.C. Canada. We have chance to buy a 2nd home at the lake in B.C. for $210,000.
We have no debts except current principal residence $437/month with $51,000 owing.
I have been wanting to take our money out of the market and put it into real estate.
We receive $3700/month from soc sec and pension. Have $345,000 in husband's 401k (he's retired now), $125,000 in traditional IRAs, and $65,600 in money market a/c's and bank accounts.
I thought we could take $50,000 from money market and bank a/c (leaving $15,600 in the bank account) for a down payment and take the remainder ($160,000) from the 401k and pay the taxes on it -or- would it be better to put $50,000 down and get a loan for the $160,000?
Any advice is greatly appreciated!
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faydra,
I am within 5 years of retirement and I have been thinking of purchasing a second home, too. There are lots of things to consider.
Have you looked at what financing the 160K would do to your cash flow? I don't know what kind of interest you are considering, but using one of those mortgage calculators, Your Monthly Payment for 30 Years for an Interest Rate of 5.750 % on a Loan Amount of $ 160,000.00:$ 933.72 a Month. You would have insurance, property taxes and routine maint. to factor in as well. You would be using quite a bit of your monthly income just for mortgage payments.
On the other hand, have you looked at the tax consequences of taking out 160K from your 401K all at once? It appears your income would be over 200K if you did this all in the same tax year. You may end up paying a lot more taxes than you thought. Plus, you could get hit for Alternate Minimum Tax (AMT). Would you be paying for the income taxes (state and federal) out of the 401K as well? This could further reduce your 401K nest egg quite a bit.
I was surprised to see that medicare part B payments are now income tested (as of Jan this year) and your DH could end up paying higher part B premiums for a year (they look at income tax records two years prior).
"As required in the Medicare Modernization Act, beginning in 2007, single beneficiaries with annual incomes over $80,000 and married couples with incomes over $160,000 will pay a higher percentage of the cost of Medicare Part B coverage, reducing Medicare’s share. These higher-income beneficiaries will pay a monthly premium equal to 35, 50, 65, or 80 percent of the total cost, depending on their income level, by the end of the 3-year transition period. "
Even if both homes were completely paid for, there will be taxes, insurance, maint and upkeep to consider.
A more fundamental question might be for what purpose do you have the 401K? Is it an emergency fund? Or, was it set up to supplement your retirement income? Or, is it "frosting on the cake"? Was it set aside to make a big ticket purchase such as this home? Do you need these assets to be liquid or will a real estate investment work with your long term plans?
It looks like you have done a good job accumulating a nest egg, but have you spoken with a professional who might be able to help you with a plan for getting your money out of the 401K/IRAs with an emphasis on minimizing the tax consequences? Right now it looks like any big ticket items that you used the money for would have painful tax consequences.
I am wondering if there is some way you could spin off some of your traditional IRA assets gradually into a Roth IRA? If you could do this incrementally each year so as to not kick youselves up into another tax bracket, perhaps you could save more of your assets from taxes (long term). After you converted your traditional IRAs over to Roth, would you be able to convert 401K money into traditional IRAs and then convert them into a Roth over the course of several years? I don't know if this is possible in your situation, but a good planner might really be worth their weight in gold to help you figure out the best way to go.
-DC
buy 2nd home w/loan or use investment money?
