Mini Case Study: Using Retirement Funds to Buy a Home
Recently, we met with a client in the Bay Area who was entering retirement and had just inherited a sizable Individual Retirement Account (IRA).
She wanted to buy a new home with the new IRA funds that she received. Unfortunately, she was surprised to learn that she could not afford the level of home that she was anticipating, even with the large value of the account that she inherited.
We helped her understand the following important concepts:
Retirement plans and the money you have in them need to be viewed through a different lens than normal spending. Because traditional retirement accounts have enjoyed tax free growth and tax-free contributions over the years, now the accumulated balance has strings attached in the form of income taxes with any withdrawals you make. The federal and state governments have been waiting patiently for their share of distributions from these accounts.
The impact of Federal and state income taxes on distributions from retirement accounts can be painful. Depending on the size of your withdrawals, decent portions could be taxed at the highest marginal tax brackets, leaving less for you to spend on a home or other needs.
Timing matters. Taking one large lump sum distribution from an IRA can be much less tax efficient than spreading the distribution across several tax years. This is especially true if you have lower income and earnings.
Beyond the taxation and price of the home, there are other higher costs to consider that may be a surprise when purchasing a home. These include increased property tax, Insurance, utilities, and general maintenance and cost of upkeep.
Taking all of these into consideration is an important part of our cash-flow strategy that’s included in the overall financial plan.
Please contact us for more information about our firm and other ways that we help clients understand and solve their financial challenges.
This material is purely intended to be general and educational in nature, and should not be construed as specifically-tailored investment, financial planning, tax, legal, or other professional advice. Information and data contained herein is as-of the date of publication, and may be subject to change in the future without notice. Any investment performance referenced is purely past performance, which is no guarantee of any future performance. Nothing contained herein should be construed as an offer to sell, a solicitation of an offer to buy, or a recommendation of any security or other financial product or investment strategy. All investment, tax, and financial planning strategies involve risk that you should be prepared to bear. You are highly encouraged to consult with professionals of your choosing before taking any action based on this material.