advice for parent on mortgage / taxes

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BeerTooth
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Joined: Wed Nov 24, 2010 2:07 pm

advice for parent on mortgage / taxes

Post by BeerTooth »

Got a call from dad yesterday. Looking to buy or build a small age-in-place house in the next couple years. Then sell larger family home and downsize.

I don't know all the details, but looking for a bit of advice on how to help him think through his options

House build cost will be something like $500k (I suspect this is a low estimate). Family home sale proceeds should net $400k in current market.

Has something in the 7 figures in an IRA. Looking at first RMD 2 years from now. Comment to me was "Mom and I will never spend all this money at current burn rate". Don't know what the asset allocation is, but within Boglehead parameters.

Goals are:
-stay invested and use an appropriate amount of leverage
-minimize taxes / fees / expenses

Decision points:
-take out conventional bank mortgage vs. margin loan against IRA assets? Recall reading "buy,borrow, die" strategy to stay invested as long as possible
-loan duration: conventional wisdom is that market returns should exceed loan costs, so leveraging real estate for 15 may make sense
-how to structure IRA to Roth conversions. RMDs are non-negotiable, but is there a calculator online to estimate tax impact of further conversions?
-anything else to consider?
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Watty
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Re: advice for parent on mortgage / taxes

Post by Watty »

BeerTooth wrote: Sat May 28, 2022 7:55 am -stay invested and use an appropriate amount of leverage
For a retired couple nearing RMD age with a 7 figure IRA the appropriate amount of leverage is 0% so they should just pay cash for a house. They have no need for leverage.

If they have an appropriate asset allocation then they will have a LOT of money in bonds that might be paying something like 2%. It is hard to make money by getting a mortgage at 5%+ when they are buying bonds at 2%.

Since they may not need the money for a few years they should start getting the money together by making IRA withdrawals when they can in the lower tax brackets.

If they want to buy a house by the end of the year and they want to spread the withdrawals out over two years then one thing they can do is to buy the house with a large down payment, like $400K, and then get the rest of the money through a home equity loan or line of credit on the new house. They can then pay that off with an IRA withdrawal next January. The home equity loan will likely be at a higher interest rate but they may be able to find a no-fee or low fee one and it will be easier to qualify for when they are retired and do not have a paycheck to show the mortgage lender as income.

If there do want to get a mortgage for some reason there are old threads that you can look up about getting a mortgage in retirement.

Federal tax rates are scheduled to revert to the old higher rates in 2026 so getting the money out of the IRA before that would likely be a good idea. It would be a topic for a different post buy they may also want to do Roth conversions before 2026 but that depends a lot on the rest of their details and their state taxes.
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CAsage
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Re: advice for parent on mortgage / taxes

Post by CAsage »

BeerTooth wrote: Sat May 28, 2022 7:55 am
(1) take out conventional bank mortgage vs. margin loan against IRA assets? Recall reading "buy,borrow, die" strategy to stay invested as long as possible
(2) loan duration: conventional wisdom is that market returns should exceed loan costs, so leveraging real estate for 15 may make sense
(3) how to structure IRA to Roth conversions. RMDs are non-negotiable, but is there a calculator online to estimate tax impact of further conversions?
(1) I'm not sure it's possible to borrow against an IRA. That "buy/borrow/die" for the very very rich, pays off the loans by selling very appreciated assets after death - and an IRA does not get a step up at death. One pays taxes on every dime.
(2) Taking out a loan might make sense. Sometimes it works that way, sometime's it's 2000 or 2008 or 2020.... You need to cashflow the payments. I whistle out the front door enjoying our paid off house .....
(3) There isn't a simple way to calculate this, multiple threads on this site. The goal is to even out your tax bracket over your lifetime. One recommendation is to convert/withdraw up to the top of your current tax bracket. People with very large IRA often withdraw more, going up to the top of any tax bracket they (or the surviving spouse will pay as Single is a lower bracket). People with large IRA also look at their heir's rates, keeping in mind heirs have to drain and pay taxes in 10 years. Big hit for peak earning years. Don't scrimp up front on Roth conversions is often good advice. And review tax efficient asset placement.
I would suggest your parents run various scenarios with tax software, and maybe set up a simple Excel or paper listing of how much they would pay in taxes with various scenarios. There are other threads with modeling software, but a ballpark plan is better than none.
Salvia Clevelandii "Winifred Gilman" my favorite. YMMV; not a professional advisor.
delamer
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Joined: Tue Feb 08, 2011 5:13 pm

Re: advice for parent on mortgage / taxes

Post by delamer »

They need enough income to qualify for a mortgage for the new house if they want to go that route.

It’s possible to use their portfolio to create some of that income (along with their Social Security, pensions, etc.) via an asset depreciation loan: https://themortgagereports.com/68921/as ... w-it-works

A local mortgage broker would be a place to start in terms of finding out what their options are. But assume that they’ll need to have a significant downpayment. When we did a construction-to-permanent loan in 2019, we needed 20% down.
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. - Alexandre Dumas, fils
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