Money ignoramous

[happyhoix]

That’s me!

So here is a question - we live in a LCOL area with a paid off house, but want to retire somewhere with a higher COL. To get the kind of house we want in the new area we need about 100K in addition to what we get from our house sale. 

We will have about 750K in 401K money when we retire. Could we pull out 100K to help purchase a house, or are there limits on how much you can remove in a year? Better to work hard in the remaining years before retirement to save up a chunk of money in regular savings and limit the house to one we can pay cash for? We don’t want a mortgage when we retire.

Thanks for the advice. 

[Lizard Queen]

You can take it all out if you want, but you're going to have to pay taxes on it if it went in pre-tax (which most likely it did). I think you should still go for a small mortgage instead.

[bookkeeper]

The money you draw from your 401k will be ordinary income when you go to pay your taxes for the year you took the draw.  If you had no other income, and no need for money to live on, it would be possible to accomplish what you suggest in one year without a massive tax bill. Most people would not be able to fund a year of their life from their cash savings, so that would be something to plan for.

There is no limit to how much you can withdrawal, just be aware of the federal and state income tax you will pay.

When DH and I retired and moved, I took a small mortgage ($60,000) at 3.3%.  This essentially split my risk as I faced the unknown of what the first few years of retirement finance would look like. The mortgage payment was small, I was able to get the real estate I wanted and we didn't have to pull large amounts from our retirement accounts right away.

Some of the best advice I got from this board was to let your 401k money work for you and grow for the first few years of retirement.  Seven years later, our balances are more than what we started with.  For this we are truly grateful.

[buystoys]

I would try to save as much as I could in Roth accounts and then taxable accounts.  We took a mortgage on our retirement home.  If we had to, we could pay it off but that would leave us strapped for cash.  DH doesn't mind the mortgage as much now because we've had a lot of gains on the money we put into taxable investments.

[seriousthistime]

Yes, you can do it.  Yes, you do have to pay taxes on the withdrawal. 

I did this when I moved from a semi-LCOL area to a VHCOL area.  I took out a bunch of money from the 401K, used some of it for a down payment on my current place, and rolled over some of it into my IRA. 

Thanks to the hot real estate market, the down payment on my current place has more than doubled so my money has worked for me. 

You don't say how the place you live now or the place you will move to treats withdrawals from retirement accounts.  Had I taken out the money while still in the semi-LCOL area, there would have been no state income tax on the withdrawal.  But I took it out some 8 months after I moved, and my new state taxed it heavily. 

So if you intend to cross state lines with your move, plan accordingly. 

[haapai]

This is off-topic and I lack tact.  I want to congratulate you for having the courage to ask the question that you asked in the OP instead of dumping on you.  Really, honestly, even asking that question takes tremendous courage and trust, and I am proud to be a part of a community where folks can ask "ignoramus" questions and not be humiliated, or at least not be made to feel small by people that they know in real life.  It's also really great that you can ask such questions without being targeted as a source of income.

But if you are part of a "we", your retirement planning really should include how the other part of  "we" will fare when you are gone and your social security check is gone too and planning for this is really tricky.  Also, while you are figuring out this question, you may discover that you need to worry a bit about what might happen to you, financially, should your spouse and their social security check, vanish. 

I'm not married, have no kids, and expect my (non-spouse) partner to predecease me but I"m still clueless about how social security benefits are taxed.  I'm pretty sure that there's a copy of Social Security for Dummies or its equivalent somewhere in this recently beagle-proofed bedroom but I haven't cracked it in months and I never got past how social security benefits are calculated.   I'm remiss too, and the questions that I have to find answers to are so much easier to tackle than the things that you are probably facing. 

Keep asking ignoramus questions.  You're not only helping yourself out, you're also giving the rest of us a shot of courage, or conscience, or something else good. 

[teen persuasion]

Just remember that if you take out $100k extra for the house, you will lose x% to taxes (your top federal rate + top state rate, which might be higher if that extra $100k pushes you into another bracket). So, say it's 22% + 5% = 27% total, you'd only clear $73k. To clear $100k, you'd need to withdraw MORE, which triggers more taxes...

[gs11rmb]

Nov 12, 2021 9:38:00 GMT -5 happyhoix said:

That’s me!

So here is a question - we live in a LCOL area with a paid off house, but want to retire somewhere with a higher COL. To get the kind of house we want in the new area we need about 100K in addition to what we get from our house sale. 

We will have about 750K in 401K money when we retire. Could we pull out 100K to help purchase a house, or are there limits on how much you can remove in a year? Better to work hard in the remaining years before retirement to save up a chunk of money in regular savings and limit the house to one we can pay cash for? We don’t want a mortgage when we retire.

Thanks for the advice. 

I understand that sentiment.  My husband is almost a decade older so he will retire a few years before me.  I have no problem continuing to have a mortgage while I'm still employed but want it gone by the time we are both retired.  I know mathematically that may not be the right decision but there's a lot to be said for peace of mind and the security of knowing the mortgage is 'gone'.

That being said, I would absolutely take out a mortgage during retirement rather than pulling ~$130K from a $750K 401K right at the very beginning of retirement.  That seems very risky.

[happyhoix]

Nov 12, 2021 15:45:49 GMT -5 teen persuasion said:

Just remember that if you take out $100k extra for the house, you will lose x% to taxes (your top federal rate + top state rate, which might be higher if that extra $100k pushes you into another bracket). So, say it's 22% + 5% = 27% total, you'd only clear $73k. To clear $100k, you'd need to withdraw MORE, which triggers more taxes...

Ok thanks I was wondering how the taxes would work.

[happyhoix]

Nov 12, 2021 12:09:04 GMT -5 seriousthistime said:

Yes, you can do it.  Yes, you do have to pay taxes on the withdrawal. 

I did this when I moved from a semi-LCOL area to a VHCOL area.  I took out a bunch of money from the 401K, used some of it for a down payment on my current place, and rolled over some of it into my IRA. 

Thanks to the hot real estate market, the down payment on my current place has more than doubled so my money has worked for me. 

You don't say how the place you live now or the place you will move to treats withdrawals from retirement accounts.  Had I taken out the money while still in the semi-LCOL area, there would have been no state income tax on the withdrawal.  But I took it out some 8 months after I moved, and my new state taxed it heavily. 

So if you intend to cross state lines with your move, plan accordingly. 

That’s a good point. Current state has low sales tax but has income tax. Area we want to move to has no state tax but high sales tax.

[happyhoix]

Nov 12, 2021 13:31:40 GMT -5 haapai said:

This is off-topic and I lack tact.  I want to congratulate you for having the courage to ask the question that you asked in the OP instead of dumping on you.  Really, honestly, even asking that question takes tremendous courage and trust, and I am proud to be a part of a community where folks can ask "ignoramus" questions and not be humiliated, or at least not be made to feel small by people that they know in real life.  It's also really great that you can ask such questions without being targeted as a source of income.

But if you are part of a "we", your retirement planning really should include how the other part of  "we" will fare when you are gone and your social security check is gone too and planning for this is really tricky.  Also, while you are figuring out this question, you may discover that you need to worry a bit about what might happen to you, financially, should your spouse and their social security check, vanish. 

I'm not married, have no kids, and expect my (non-spouse) partner to predecease me but I"m still clueless about how social security benefits are taxed.  I'm pretty sure that there's a copy of Social Security for Dummies or its equivalent somewhere in this recently beagle-proofed bedroom but I haven't cracked it in months and I never got past how social security benefits are calculated.   I'm remiss too, and the questions that I have to find answers to are so much easier to tackle than the things that you are probably facing. 

Keep asking ignoramus questions.  You're not only helping yourself out, you're also giving the rest of us a shot of courage, or conscience, or something else good. 

The times I’ve screwed up the most in life is when I either didn’t admit I didn’t admit I was ignorant on a certain topic.

After a few screw ups I got humble enough to admit when I don’t know something. Besides, this is the money board right? Glad I can tap into some group knowledge.

[The Walk of the Penguin Mich]

Just be careful.  If you do this as you are reaching Medicare age, it will bump up your Medicare premium for a year.  IRMAA looks back 2 years, so my Medicare premium for part B is going off of 2020 taxes for 2022.

Don't forget to include the state taxes of the higher COL area you are going to if it’s in another state.  

[teen persuasion]

Another way to look at it: with $750k at a 4% SWR, that's $30k income per year (inflation adjusted) from your retirement funds.

If you withdraw $100k + taxes, you are left with ~$610k, or roughly $24k income annually.

What would be the annual cost of the $100k mortgage? If it's less than $6k, I'd keep the funds in retirement accounts and pay on a mortgage from the larger annual withdrawals. The mortgage will eventually get paid off, but the larger retirement accounts will continue to allow larger withdrawals forever.

[happyhoix]

Nov 13, 2021 9:24:17 GMT -5 teen persuasion said:

Another way to look at it: with $750k at a 4% SWR, that's $30k income per year (inflation adjusted) from your retirement funds.

If you withdraw $100k + taxes, you are left with ~$610k, or roughly $24k income annually.

What would be the annual cost of the $100k mortgage? If it's less than $6k, I'd keep the funds in retirement accounts and pay on a mortgage from the larger annual withdrawals. The mortgage will eventually get paid off, but the larger retirement accounts will continue to allow larger withdrawals forever.

Ok you convinced me. 

We have about 50K in a Roth. I was going to use part of it to pay cash for a new car the year I retire. What I’ll do now is keep funneling money into the Roth and also into savings between now and retirement, and if we don’t have enough to pay cash for the house we can do a small mortgage. (Now to convince DH, AKA Mr Cheap, who wants to enter retirement completely debt free.) 

[happyhoix]

Thanks everyone for the input!  I knew you guys could help. 

[teen persuasion]

Just watch out for how small a small mortgage is - there's a minimum amount for a new mortgage. When we had an ugly 9.75% mortgage, we couldn't refi it thru our lender. But the balance was too small for a new lender, no one would do it at $40k (this was years ago). IDK where that minimum is now.

It may also be easier to secure a mortgage while you are still employed, rather than retired, so plan ahead.

[Bonny]

Nov 13, 2021 10:06:57 GMT -5 teen persuasion said:

Just watch out for how small a small mortgage is - there's a minimum amount for a new mortgage. When we had an ugly 9.75% mortgage, we couldn't refi it thru our lender. But the balance was too small for a new lender, no one would do it at $40k (this was years ago). IDK where that minimum is now.

It may also be easier to secure a mortgage while you are still employed, rather than retired, so plan ahead.

Where I live (SF Bay Area) the minimum was $300k for the government backed loans. People may have an easier time with a local credit union.

[seriousthistime]

Nov 13, 2021 1:16:45 GMT -5 The Walk of the Penguin Mich said:

Just be careful.  If you do this as you are reaching Medicare age, it will bump up your Medicare premium for a year.  IRMAA looks back 2 years, so my Medicare premium for part B is going off of 2020 taxes for 2022.

Don't forget to include the state taxes of the higher COL area you are going to if it’s in another state.  

It is possible to get the IRMAA reduced if you have a "life changing event."  One such event is income reduction due to stopping work or reducing your work hours. If your income will go down with retirement (as it does for many people), you can file an IRMAA appeal based on the fact you stopped working (or reduced your hours if you work part time in retirement).


www.medicareinteractive.org/get-answers/medicare-denials-and-appeals/premium-appeals/appealing-a-higher-part-b-or-part-d-premium-irmaa