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Selling my paid for home ($400,000) and going to a +55 community with a new build ($600,000). With interest rates as low as they are I’ll be taking a $300,000 mortgage. Selling the current residence after the new home purchase. Choice is taking the $300,000 from savings account ($1.1 million) or IRA ($3 million). Plan is to back fill after the move with the money from the sale. Time period will be 2 months. What are the tax implications to what in essence is a self financed bridge loan?
Selling my paid for home ($400,000) and going to a +55 community with a new build ($600,000). With interest rates as low as they are I’ll be taking a $300,000 mortgage. Selling the current residence after the new home purchase. Choice is taking the $300,000 from savings account ($1.1 million) or IRA ($3 million). Plan is to back fill after the move with the money from the sale. Time period will be 2 months. What are the tax implications to what in essence is a self financed bridge loan?
I don't think that there would be any "tax implications" to doing so unless you have some unusual circumstances. As I see it, you're selling one house and would likely be eligible for a tax free capital gain of $250K if single or $500K if married filing jointly. Then you will change your primary residence to the new house. Even if you change your primary residence to the new house a couple of months before selling the old one, I don't think that would matter.
Basically, as I see it, there will be no federal tax implications of what you plan to do assuming you haven't been renting out your current primary residence and assuming that you have lived there for 2+ years as your primary residence out of the past 5 years. Below is a link to the IRS publication about "Selling Your Home".
Thanks Chas. I guess my question is if I pull from the IRA and put it back two months later do I get a pass on the taxes?
"Generally, early withdrawal from an Individual Retirement Account (IRA) prior to age 59½ is subject to being included in gross income plus a 10 percent additional tax penalty. There are exceptions to the 10 percent penalty, such as using IRA funds to pay your medical insurance premium after a job loss. For more information, see Hardships, Early Withdrawals and Loans."
I don't think I would mess with my IRA account. I suggest you explore other options such as borrowing against other assets (house, stocks, savings accounts, etc) and then repaying the loan once your current home sells.
I think you would still need to pay the taxes on the IRA distribution, but I’m not sure. With over a million in cash in a savings account, which would not be taxed as income upon withdrawal, I don’t know why you wouldn’t take it from there instead of the IRA, which is likely increasing in value and could trigger taxes.
Even if there is no penalty for age, you still have to pay tax on what you withdraw for the year in which it was withdrawn. Do you really want to increase your taxable income by $300K, or $400K, or whatever in one year just to have use of the money for a couple of months? You would be increasing your Federal taxes owed by nearly $100,000 or maybe more, depending on how much you withdraw and what your tax bracket is. You'll also owe state taxes on IRA distributions if you live in a state that has state income tax.
In short, you could be hit with a tax bill of $100K or more for doing what you are suggesting. I think you could find much better and cheaper ways of obtaining the cash you need for a few months. Heck, why not just take out a construction mortgage loan on the new home and then pay it off after you sell your house? It might cost you about $4,000 in closing costs, but that's a heck of a lot less than $100K you would pay in taxes from withdrawing from your IRA.
I agree that I'd leave the IRA alone, especially since you state you have $1.1m sitting just in savings.
If it's just sitting in ordinary savings, Its probably not earning much.
Even if by "savings" you mean it's all locked up in, say, CDs, and you're worried about penalties for early withdrawal, I'd say that cost is still less than any implications of messing with an IRA.
I don't know all about tax implications yet myself, but if I was in your position (will be in about 10 years with less in funds), I'd just take from savings and replace when I sold the old house.
I see no reason to stir a hornets nest.
But what do I know?
When I take out of my Roth or IRA, it will be to permanently use.
Best to you, but I'd "KISS" (Keep It Simple Stupid).
Separate from this house transaction, you may want to model some alternative withdrawal plans for the future. The conventional wisdom with regard to taxes is "the least, the latest". Pay the least you can and pay the latest you can.
However, with RMDs looming in your future at age 72, you may want to accelerate some taxable income forward to lessen the RMD amount in the future.
Without my knowing your other financial income sources between now and age 72, I cannot speculate on your income and tax situation. However, starting at age 72, you will incur large taxable withdrawals from your IRA, all of which will be ordinary income (based on current tax law). Assuming a 5% CAGR in your IRA, your age 72 RMD will be approx. $150,000. Coupled with your other income, this will trigger IRMAA.
Some people find it advantageous to "smooth" the taxable income by taking withdrawals from taxable and tax deferred accounts prior to the RMD, rather than solely using the taxable accounts prior to RMD.
I'm not necessarily recommending this path, just suggesting a consideration.
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