Personal Finance

Money Matters: Advice for retirees looking to buy before selling current home

Q. My husband and I are in our 60s, retired, have no debt and have lived in the same home for over 40 years. We both have decent-size IRA rollovers, take our Social Security benefits, he has a small pension and we have a decent-size non-IRA brokerage account.

Our daughter and son-in-law are moving to another state with our only grandchild. We happen to like the area to which they are moving. We actually thought about retiring there before our grandson was born, and changed our minds because he is so much fun to be around. Now, we plan to sell our current home and move to be near our daughter’s family.

We’d like to buy our new home before we sell this home so we don’t have to move twice. We have some ideas on how to pay for the new home but would like your advice. Should we borrow from our IRAs (hoping to pay it all back when our house sells), sell non-IRA funds and take the capital gains tax or take out a mortgage and then pay that off when this house sells? FYI: Our current home is probably worth around $500,000, and we wouldn’t spend any more on a new home, maybe much less.

A. How exciting and fortuitous that they are moving somewhere you’d like to live! That’s especially important should they decide to relocate again and you are not willing or able to follow them.

With interest rates so low, a mortgage with no prepayment penalty may be a good option for some or all of the costs associated with purchasing your new home before your current home sells. I suggest you speak with a mortgage broker to determine what is needed for you to qualify for a mortgage and what closing costs you will incur. Ask about any prepayment penalties and how much higher the interest rate would be on a no-closing cost loan.

Recently, regardless of net worth, my retired clients have needed to demonstrate a certain income stream in order to obtain a mortgage on a new home or when refinancing. If both of your Social Security benefits and your husband’s pension are not enough, you may need to begin a monthly withdrawal from your IRAs or non-IRA account to qualify for a mortgage even if you don’t need this money to meet your living expenses. You’d want to begin this process sooner rather than later because they like to see four to six months of the required income stream.

Once your mortgage is approved, you can lower or stop the withdrawals. Once your current house sells you can pay off the mortgage. You may decide to keep the mortgage if you think you can invest the proceeds from your home sale conservatively and achieve a rate of return that exceeds the mortgage interest rate. I would suggest you pay off the mortgage and not take the investment risk.

If you can’t qualify for a mortgage on the new home or if that is not appealing to you, as you mention, there are other options. Two you didn’t mention are 1) obtaining a home equity line of credit on your current home and 2) adding a margin feature to your non-IRA brokerage account.

You could use the HELOC to pay for or make a large down payment on your new home. When your current home is sold, the HELOC will be paid off at closing. Current HELOC interest rates are very low so this may be a good option for all or part of the money needed for the new home purchase. The margin feature on your brokerage account will allow you the ability to borrow up to 50 percent of your account value with your account holdings as collateral. Margin loan interest is rather high (around 6 to 8 percent annually) but depending on your income tax rate, it may be less expensive than selling investments and paying capital gains tax.

Borrowing from IRA

You can “borrow” from your IRAs but there are rules that make this option less desirable if you don’t think you can adhere to them. Funds withdrawn from an IRA placed back into the IRA within 60 days are not subject to income tax or penalties. Whatever portion of the withdrawal not replaced within 60 days will be subject to income tax and early withdrawal penalties if you are under age 59 1/2. If you decide to use this option, you need to have contingencies in place if your current home does not sell and the funds are not available to you for deposit within 60 days. This is called a 60-day rollover, and an IRA owner is only allowed to do this once every 365 days regardless of the number of IRAs owned.

Some states require that income tax be withheld unless a special tax document is submitted. If you don’t have this waived, the tax will be withheld from your distribution and you will need to find other monies with which to make the full deposit within the 60-day period. You’ll get a tax refund for the amount withheld but not until you files your taxes. Depending on the amount withdrawn, if you miss the 60-day window you may put yourself in a much higher income tax bracket (top rate is 39.6 percent federal plus state tax) which may also impact the amount of taxable Social Security and your Medicare premiums.

If you decide to borrow from your IRA and see that you are going to miss the 60-day window, you could then go on margin with your non-IRA brokerage account. Make the IRA deposit with the money from your margin loan and repay the margin loan when your current home sells.

As always, a meeting with a knowledgeable adviser to discuss your personal situation is advised.