Mortgage vs cash

It is number crunching time

Take a large amount out of your tax deferred accounts and

a) you might move into a higher tax bracket both federal and state

b) more of your Social Security might be taxed

c) your premiums for Medicare Part B and Part D will go up if your AGI is greater than $170K for a couple ($85K for singles).

Consider a high down payment on the new house, a mortgage and then extra principal payments from your tax deferred accounts.

Surprise expenditures - a new car, HVAC, a bypass, a home health aide etc. - suggest a need for some liquidity

If you can sell the old house and buy the new with cash, I'm all for that.

Withdrawing funds from a tax-deferred account isn't "good." It's taxed as ordinary income, so while you may naturally fall into the 10/15% bracket, the large withdrawal may push you into the 25% bracket and possibly cause some social security to be taxed.

We're mixing issues a bit, which obfuscates the situation. I suggest you simply sell the old house and use the proceeds to buy the new. If it's the timing that's tough, get the mortgage on the new house but pay it back when the old one sells.

What will you do with the old house if you keep it? Thumper

We plan on selling it for an est $100k equity profit, but we don't know how long it will take to get ready, sell, and close. Recent sales in the neighborhood have ranged from a week to over 6 months (still not sold)- same exact model about 2 streets from each other. The second one a short sale @ $40K less. Weird.

Chip

But... one of them is only a few years away from making RMDs. Maximizing funds remaining in the tax-deferred account now is also maximizing the size of the RMDs in the future, and therefore the taxes in the future.

Isn't it better to evenly spread out the withdrawls from the tax- deferred account to try to keep taxes in the lowest possible bracket for all the future years?

Not necessarily.

Soapbox time - In 2011, the couple has $7400 exemptions and $13,900 in standard deduction. These numbers rise slightly each year, and in '11 total $21,300. They then have $17K taxed at 10%, and $52K taxed at 15%. $90K is higher than most people have for retirement income.

Without knowing their exact taxable income, or what their plans for SS kick in, the general advice I offer is to convert to Roth just enough to top off their current bracket. Proper planning can address your concern (a valid one, but one that can be dealt with) and keep the retirees from withdrawing at 25% either due to RMDs or large withdrawal.

For some, a combination of delayed social security and conversions make the most sense. For those lucky enough to hit the top of the 15% bracket, avoidance of 25% may not be possible. As with most discussions, exact numbers would lead to a detailed plan.

Let me know if that makes sense.

Watch out for prepayment penalties. Insist on a mortgage without a prepayment penalty, even if you have to take a higher interest rate (provided you are sure you are going to pay it off after the old house sells).

Good point for the general reader here. The OP said he'd get a VA loan which do not have any prepayment penalty.

On Jul 28, 3:19 pm, Chip Wood wrote:  [snip]

Today's borrowing mania makes things like paying cash for goods and services seem 'quaint' - but paying for what one gets is still the foundation of an economy. The large withdrawal tax consequences (which others here have mentioned) *might* possibly be avoided by making periodic prepayments, if that's what you want to do. In favor of a mortgage, interest rates are unbelievably low currently. Normally, I'd say borrow at 3.75% and keep your cash in 5% yielding Treasuries. But today isn't normal, and you may have to wait two years or more to lock in a favroable return on cash.

You may not have to pay any capital gains tax on the sale of your old home. So sell that and buy a new place with a low interest mortgage.

Use your excess cash to pay the taxes for conversion of your tax deferred accounts to Roth accounts.

You don't need a single story house, just have at least one bedroom and full bath on the main floor. You can have a couple bedrooms on the

-- Ron

With the same warning. Don't convert so much at once that you blow through your current bracket. Odds are, you are just at 15%. Convert enough to top it off, i.e. be at the top of the 15% when filing. If this strategy appeals to you and you have any questions, ask here. When done right, this can help you save a bit on future taxes.

Have no extra bedrooms anywhere and you won't have to worry about guests. Thumper