We're currently in Cleveland, OH (now you might understand why we want to move to SD ). We own our current home (~$250K market value) with no mortgage and live off of my salary as a govt employee. My wife works part time and anything she makes goes directly into our savings pot after contributions to her 401K. With home prices in San Diego currently around the $700-$800K range, I figure we'll need about $600K+ (in today's $) to buy a house there. I expect to receive a govt pension of about $45K a year with survivorship (in today's $). We currently live on about $36K a year (that is my net after putting money aside in my TSP, Roth, kid's 529s, biweekly auto-investments into Vanguard, and taxes). I'm expecting that adding back in health insurance, higher property taxes, kid's 529 contributions and expenses, etc., that we can live on $55K - $60 net. So I feel confident that we can live off my pension with supplements of about $20-$25K from my TSP and investments. I don't plan to take SS until 70, but might take it earlier if it makes sense for our cash flow situation (I'm not too concerned about maximizing lifetime benefits). So paying for the house is our major obstacle. We have the following sources of funds for the house:
- $940,000 in a TSP (401K) - continue contributing max + catch-up starting next year
- $560,000 in taxable Vanguard mutual funds - continue contributing $500 every 2 weeks
- $65,000 in my Roth - continue contributing max + catch-up each year
- $85,000 in wife's Roth - continue contributing max each year
- $170,000 in wife's traditional IRA and 401K - probably not an option since we can't use this without penalty
- $60,000 in cash that is currently our emergency fund - wife's salary goes in here, when pot grows, move to Vanguard
What is the most tax efficient way to pay for the house? We're currently in the 25% tax bracket. Does it make sense to take out a mortgage? I know that home prices, mortgage rates, and taxes will change in the future, but let's assume today's numbers and tax rules, and I can make adjustments in the future when these change. My thinking is to use the equity ($250K) and most if not all of the taxable account ($560K) and take out a smaller mortgage if needed and pay that down with my TSP funds. But one other consideration is that I be hit with large RMDs from my TSP when I turn 70-1/2, so I want to do some Roth conversions or spend down the money. So maybe I should take out a larger mortgage and pay it with my TSP funds and leave the Vanguard funds mostly intact.
I know there are a lot of variables, and my question isn't if I can or should move to San Diego and buy a house. I want to keep the discussion to: What's the best way to pay for the house, and what actionable items can I do now and in the next 5 years to prepare? If the answer is to use the Vanguard taxable account, I need to consider starting to move money from the long term to the short term pot in the Vanguard account and paying the capital gains taxes (and OH rather than CA taxes), and maybe moving money from the G-fund to the C and S-funds in my TSP to maintain my ~60/40 stock/bond allocation. Right now, my Vanguard account is in the Total Stock market and Total International Stock funds, while my TSP has about $700K in the G fund and the rest split between the C and S funds. I haven't considered using Roth money, but if it makes sense to, maybe I should contribute part of my TSP money to the Roth TSP, at least the catch-up amount.
Thanks in advance for any suggestions. Even if you don't have a concrete answer, maybe you can help me by suggesting something I may have overlooked that I need to consider in my decision.