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Want to finance new home with liquid assets and IRAs - any flaws in my plan or suggested alternate options?

JAZ1033 10 17 November 15, 2015 at 03:05 PM in Home & Home Improvement (2)
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I am currently renting and have been living (frugally) off of savings since July 2013. I live off of about $12K-$15K a year. I could probably stretch my savings until age 59 1/2. I will turn 56 early next year. I'm hoping I don't have to work anymore.

Since I have no substantial income (relatively small amount of interest income), I was going to try to qualify for an "asset dissipation/depletion" mortgage for part of it.

I can use savings, early withdrawal of CD (penalty applies), and savings bonds to pay for part of the purchase.

I can withdraw contributions and a prior conversion from my Roth IRA tax- and penalty-free, since I've had the Roth for more than five years. I haven't owned a home since Jan. 2013, so I will qualify as a first-time homebuyer. That means I can withdraw up to $10,000 from my Roth and/or Traditional IRA penalty-free.

When I conservatively computed a 15-year fixed rate mortgage on $40K at 5% (I have excellent credit), the total interest I'd pay over the life of the mortgage comes out to substantially more than I'd pay in taxes and penalty on early withdrawal of that amount from my IRAs (split between 2015 and 2016). I wouldn't be in higher than a 15% federal income tax bracket, and a state income tax bracket of about 4%.

If I need to continue to withdraw from my IRAs for living expenses, I could implement SEPP (substantially equal periodic payments) for five years to avoid the 10% penalty. After that, I'd be past age 59 1/2 and could continue to withdraw penalty-free.

Anyone have thoughts on my plan where I may have missed something? Or any alternative suggestions?

I know I could wait until 59 1/2 and allow my IRAs to grow some more. I could also reallocate so I'm more ready. My IRAs are in Vanguard 2025 Target Retirement funds. But I'm tired of renting, and there are limited lots left with no lot premium being charged where I want to live.

TIA for any feedback!

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#2
First off, let me say I admire the fact that you can live on $12K-$15K/yr. I have to say, being tired of renting is probably not the best reason to buy a house. However, if your IRA contains sufficient funds to ensure that you'll be able to pay the mortgage, taxes, uilities, etc..., and any unanticipated (relatively) major expenses, even in the event of a 2008-style market downturn, then I'd say go for it.that may come up
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#3
Buy bonds, and keep them, let the quarterly interest pay for your house. People been doing that for decades.
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#4
I think trying to buy a home is a bad financial decision. First off, you don't make enough to cover owning a home. What happens when the roof needs to be replaced, there goes 1-3 years of available income. You don't make enough to save up for when bad things happen.

Second, I would say it will be very difficult to find a mortgage. If you do, your interest rate will most likely be greater than 5% or the fees associated with the mortgage will be great.

Third, financially it is never a good idea to borrow from your retirement to pay for a home. Especially one that is under 50K? That type of house will most likely never increase much in value, at least not more than what you will probably make in those retirement accounts.

On a another note, how much do you think mortgage, taxes, utilities, insurance etc.. be each month? Add that plus monthly healthcare costs and i would think you would barely have enough for anything else.

You are going to do what you want to do, but I would say don't do it. Keep renting for the rest of your days and let someone else take care of the dwelling. One issue with the house and you could be ruined.
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#5
This could work. But the key question is how much do you have in your IRA account? You cannot expect relevant feedback if you leave out key facts.

If you have lived frugally, saved and invested 50% of your income for the last 30 years then you should not have a problem with the above. I assume this is not the case though.
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#6
Quote from discostu58 View Post :
I think trying to buy a home is a bad financial decision. First off, you don't make enough to cover owning a home. What happens when the roof needs to be replaced, there goes 1-3 years of available income. You don't make enough to save up for when bad things happen.

Second, I would say it will be very difficult to find a mortgage. If you do, your interest rate will most likely be greater than 5% or the fees associated with the mortgage will be great.

Third, financially it is never a good idea to borrow from your retirement to pay for a home. Especially one that is under 50K? That type of house will most likely never increase much in value, at least not more than what you will probably make in those retirement accounts.

On a another note, how much do you think mortgage, taxes, utilities, insurance etc.. be each month? Add that plus monthly healthcare costs and i would think you would barely have enough for anything else.

You are going to do what you want to do, but I would say don't do it. Keep renting for the rest of your days and let someone else take care of the dwelling. One issue with the house and you could be ruined.
I'd agree with this. There are too many unknowns with owning a home that could easily get you in trouble with no income and no buffer.
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#7
Thanks for all the comments so far. I realize now that I wasn't totally clear on some details. The house I want to purchase is around $180K - new construction with 10-year warranty and including all new appliances.

The additional $40K I was using to compare mortgage interest vs. taxes/penalties on IRA early withdrawals was the remaining balance I would need to pay for the house. Another thing I found out today was that I would get a 1 1/2 % discount from the builder on a cash purchase. They would take five draws from me over the building period, so I'd basically be acting as my own bank.

I have about $270K in my IRAs, and it will take 5-6 months to build the house, so I will continue to rent for that time period. Because I have no income, I qualify for discounted utilities and cost-free health insurance. Those programs do not take assets into account - only income. I do get a little food assistance monthly, too, although not food stamps (those take assets into account so I wouldn't qualify).

I know I need to do more number-crunching to determine anticipated expenses like taxes & homeowners insurance and make sure I'm comfortable that my IRAs will last long enough. Ten or so years down the road I would expect to start collecting some social security to supplement my living expenses, and there are additional services for older folks without no/low income to help with home repairs, meals, etc.

As far as reallocating my assets in my IRAs, I like the 3 buckets method I've hear of for retirement: a years' worth of living expenses in cash accounts; five years' worth in bond accounts; and the rest in stock accounts for continuing growth. And then keep transferring money down into the buckets regularly from stocks to bonds to cash.

One other comment: I feel like I lived frugally all my life and maxed out IRAs as much as I could starting in my early 20's, and now my money is "stuck" in my IRAs. If I don't access the funds during my "early retirement" I'll have to keep renting, which I don't want to do.

Any additional thoughts?
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#8
Quote from JAZ1033 View Post :
I have about $270K in my IRAs,


maxed out IRAs as much as I could starting in my early 20's,

Am I missing something? 30+ years...so you put in an average of like $8K per year including all interest earned?

Maybe I need more coffee. That's likely it.
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#9
Quote from uniquename View Post :
Am I missing something? 30+ years...so you put in an average of like $8K per year including all interest earned?

Maybe I need more coffee. That's likely it.
The bulk of the value of my IRAs is from growth, not from contributions. I always reinvested all earnings (interest and dividends).
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#10
I'm intrigued by the concept of "cost-free health insurance". Does this mean the OP is just incredibly healthy and doesn't anticipate the need for future medical services? Or does "I'm hoping I don't have to work anymore." translate into: "I figure the rest of you hard-working suckers will pick up the tab for the health insurance I can't possibly afford."

And while we are at it we might as will kick in a few more tax dollars to provide for your food, utilities, and future home repairs as well.

Sounds like the new American Dream. I say go for it. Thumbup
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#11
I am missing the part about how you are planning to pay for the house. Are you taking an early withdrawal to make a down payment and then taking a mortgage out for the home?

If thats the case, I am curious to know what lender would even consider underwriting this mortgage.
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#12
Quote from JAZ1033 View Post :
The bulk of the value of my IRAs is from growth, not from contributions. I always reinvested all earnings (interest and dividends).

That...makes me more confused. So, you say you "maxed out" yet contributions and interest were less than $10k/year?
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#13
Quote from uniquename View Post :
That...makes me more confused. So, you say you "maxed out" yet contributions and interest were less than $10k/year?
In the "old days" you could only contribute a maximum of $2000 a year to a traditional IRA and be able to deduct it. The maximum contributions allowable to IRAs slowly increased over the years. A lot of the growth of the IRAs comes from capital gains. Less than 20% of the value of my traditional IRA came from contributions. The rest is from the power of compounding.
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Quote from Iaaaiws View Post :
I'm intrigued by the concept of "cost-free health insurance". Does this mean the OP is just incredibly healthy and doesn't anticipate the need for future medical services? Or does "I'm hoping I don't have to work anymore." translate into: "I figure the rest of you hard-working suckers will pick up the tab for the health insurance I can't possibly afford."

And while we are at it we might as will kick in a few more tax dollars to provide for your food, utilities, and future home repairs as well.

Sounds like the new American Dream. I say go for it.
If it makes anyone feel better, I had an undiagnosed developmental disability all my life and struggled in the work place, even though it affected my physical and mental health. I just recently got the diagnosis. Now I'm trying to retire early for my own sanity. I'm grateful for the services I get, and I plan to "give back" at the end of my life by donating my assets to the charities that are helping me now, so others like me can get the services they need.

Sorry for going so "off topic" in a finance forum, but I don't want people to get the idea that I'm a "lazy bum" and don't want to work. I wish my mind and body would allow me to keep working. My mom worked until age 81!
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#15
Quote from JAZ1033 View Post :
In the "old days" you could only contribute a maximum of $2000 a year to a traditional IRA and be able to deduct it. The maximum contributions allowable to IRAs slowly increased over the years. A lot of the growth of the IRAs comes from capital gains. Less than 20% of the value of my traditional IRA came from contributions. The rest is from the power of compounding.

Missing puzzle piece! Makes a bit more sense now.

Thanks, and GL!
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