cash home purchase from I Bonds, Roth, and/or tIRA?

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
Topic Author
VagabondJoe
Posts: 6
Joined: Tue May 10, 2022 2:55 pm

cash home purchase from I Bonds, Roth, and/or tIRA?

Post by VagabondJoe »

Age: 62
Status: retired
Debt: none
Annual Taxable Income: $0 earned; tIRA withdrawals and Roth conversions to fill 12% tax bracket
Annual Expenses: $35K
Tax Filing Status: Married Filing Jointly
Marginal Tax Rate: 12% Federal, 0% State
Assets and Locations:
- Traditional IRAs and 401k: $900K
- Roth IRAs, 401k, and HSA: $600K
- I Bonds: $180K (~$22K being tax-deferred interest)
- “High Yield” Savings Account: $280K
Asset Allocation (excluding HYSA cash set aside for ASAP home purchase): 65% stocks / 35% bonds
Plans: purchase house as primary residence ASAP; continue private (non-ACA) health insurance until Medicare; claim Social Security age 70 (his primary, her spousal); Roth conversions to top of 12% (15%) bracket until RMDs

Question:
Which funding sources to cash purchase a $400K - $500K home this year (or next, if a suitable home is not found this year)? We do not have a current house to sell. The HYSA ($280K) was funded specifically in anticipation of a house purchase, but we’ll need an additional $120K - $220K to buy a house in our expected price range.
- I Bonds? (likely candidate, but finally becoming attractive in current conditions; once sold will take a long time to replenish at $20K/year)
- Roth?
- tIRA /t401k? (some Roth conversion done this year; ~$20K to top out the 12% tax bracket, so withdrawals here would push me into a higher bracket)
User avatar
FiveK
Posts: 12637
Joined: Sun Mar 16, 2014 2:43 pm

Re: cash home purchase from I Bonds, Roth, and/or tIRA?

Post by FiveK »

VagabondJoe, welcome to the forum.

You mention "cash purchase." A mortgage might allow you to keep your tax rates lower while you pay it off, vs. incurring a very large tax bite this (or next) year. Have you looked at doing that?
LittleMaggieMae
Posts: 1569
Joined: Mon Aug 12, 2019 9:06 pm

Re: cash home purchase from I Bonds, Roth, and/or tIRA?

Post by LittleMaggieMae »

Isn't the purpose of IBonds when built up to a large balance for retirement use, and Roth balances to help one's yearly retirement income to balance out or fit into specific tax brackets or to be under specific income levels (like SS or Medicare/IRMAA or ACA or something else)?

Basically the Ibonds and Roth give you financial flexibility (spending?) when drawing down accounts that will be taxed as income?

It doesn't sound like a good idea to use those to pay cash for a house (you'd have to sell the house (an expense) or take a loan (an expense) to be able to use the equity should you need it.

Would a mortgage better suit your long term plans??

I know the old saw about mortgage debt being bad. And being retired with a mortgage seems to equate to some sort of financial failure... but I'm thinking the every day Boglehead (at any financial level) - isn't the target audience that best benefits from following/acting on that advice.
mega317
Posts: 4811
Joined: Tue Apr 19, 2016 10:55 am

Re: cash home purchase from I Bonds, Roth, and/or tIRA?

Post by mega317 »

How hard is it to get a mortgage with no income?
https://www.bogleheads.org/forum/viewtopic.php?t=6212
User avatar
celia
Posts: 14438
Joined: Sun Mar 09, 2008 6:32 am
Location: SoCal

Re: cash home purchase from I Bonds, Roth, and/or tIRA?

Post by celia »

What source(s) currrently fund your $35k living expenses? If you sell any of those sources, you will have to pull living expenses from somewhere else. Your living expenses will also increase since you will have to pay property taxes and insurance, but rent (if any) would go away. You should also include all taxes and medical insurance in your living expenses, if not currently doing so.

How much do you expect from SS at age 70 for each of you? If you will be getting over $40K, that will likely fund your living expenses then.

In regards to the 12% tax bracket. It tops out at a Taxable Income of $83,500 this year. If you add back the standard deduction of $25,900 for this year, you can have an AGI of $109,400. If you have more than that, the excess will be taxed at 22% or Qualified Dividends at 15%.
Topic Author
VagabondJoe
Posts: 6
Joined: Tue May 10, 2022 2:55 pm

Re: cash home purchase from I Bonds, Roth, and/or tIRA?

Post by VagabondJoe »

FiveK wrote: Wed May 11, 2022 12:55 pm You mention "cash purchase." A mortgage might allow you to keep your tax rates lower while you pay it off, vs. incurring a very large tax bite this (or next) year. Have you looked at doing that?
Thanks for the question. I have briefly researched it. With zero income, qualification would have to be by means variously known as "asset depletion", etc. Besides, lending rates across the board are increasing so qualification is becoming ever more strict, and interest payments becoming ever greater. So I've been leaning towards cash for simplicity and possible financial advantages.
Topic Author
VagabondJoe
Posts: 6
Joined: Tue May 10, 2022 2:55 pm

Re: cash home purchase from I Bonds, Roth, and/or tIRA?

Post by VagabondJoe »

LittleMaggieMae wrote: Wed May 11, 2022 1:10 pm Basically the Ibonds and Roth give you financial flexibility (spending?) when drawing down accounts that will be taxed as income?
I agree, and that's why I would lean toward those before tIRA/t401k.
LittleMaggieMae wrote: Wed May 11, 2022 1:10 pm It doesn't sound like a good idea to use those to pay cash for a house (you'd have to sell the house (an expense) or take a loan (an expense) to be able to use the equity should you need it. Would a mortgage better suit your long term plans??
Perhaps it would, but please see my prior reply regarding no income mortgages.
LittleMaggieMae
Posts: 1569
Joined: Mon Aug 12, 2019 9:06 pm

Re: cash home purchase from I Bonds, Roth, and/or tIRA?

Post by LittleMaggieMae »

VagabondJoe wrote: Wed May 11, 2022 3:05 pm
LittleMaggieMae wrote: Wed May 11, 2022 1:10 pm Basically the Ibonds and Roth give you financial flexibility (spending?) when drawing down accounts that will be taxed as income?
I agree, and that's why I would lean toward those before tIRA/t401k.
I don't mean avoiding taxes now.... I mean, like, in future years - when say you need to keep your taxable income below X$ but need to draw X +20K from your tIRA/t410K. - if you had Ibonds or a Roth or cash you could draw from - you could take X from your tIRA/t401K and then 20K from Ibonds,Roth, Cash - and keep your taxable income below X $

I would assume you will have some lumpy big ticket expenses in retirement - a new vehicle, a roof for your house, or a year with a bunch of "small to medium" expenses that add up to a Big Amount. Because taking it all out in one big lump sum can have unintended tax consequences.

It looks like you would be draining your post tax accounts early in your retirement....

It's especially 'eye opening" when you all go from Married Filing Joint to a Single Filer. :(
Topic Author
VagabondJoe
Posts: 6
Joined: Tue May 10, 2022 2:55 pm

Re: cash home purchase from I Bonds, Roth, and/or tIRA?

Post by VagabondJoe »

celia wrote: Wed May 11, 2022 1:57 pm What source(s) currently fund your $35k living expenses? If you sell any of those sources, you will have to pull living expenses from somewhere else. Your living expenses will also increase since you will have to pay property taxes and insurance, but rent (if any) would go away. You should also include all taxes and medical insurance in your living expenses, if not currently doing so.
I have been drawing down HYSA for 2 years. After that is depleted for the home purchase, expenses will be funded from tIRA/t401k withdrawals (which I want to draw down anyway for expenses + conversions to reduce eventual RMDs). All taxes and insurance were included; we live very efficiently.
celia wrote: Wed May 11, 2022 1:57 pm How much do you expect from SS at age 70 for each of you? If you will be getting over $40K, that will likely fund your living expenses then.
Various calculators including .gov forecast ~$45K (me) + ~$18K (her) annually based on my actual earnings history. Of course we expect SS benefits to be adjusted downward across the board at some point, but even a commonly expected ~25% reduction would still fund essentially all of our expenses, so the remainder of our assets should be mostly a safeguard against the unexpected and/or an estate for our heirs.
celia wrote: Wed May 11, 2022 1:57 pm In regards to the 12% tax bracket. It tops out at a Taxable Income of $83,500 this year. If you add back the standard deduction of $25,900 for this year, you can have an AGI of $109,400. If you have more than that, the excess will be taxed at 22% or Qualified Dividends at 15%.
Correct. As I wrote, I have about $20K remaining this year to top out 12%. So the next 22% marginal bracket would make taxable sources additionally costly vs. a Roth withdrawal.
Topic Author
VagabondJoe
Posts: 6
Joined: Tue May 10, 2022 2:55 pm

Re: cash home purchase from I Bonds, Roth, and/or tIRA?

Post by VagabondJoe »

LittleMaggieMae wrote: Wed May 11, 2022 3:19 pm I don't mean avoiding taxes now.... I mean, like, in future years - when say you need to keep your taxable income below X$ but need to draw X +20K from your tIRA/t410K. - if you had Ibonds or a Roth or cash you could draw from - you could take X from your tIRA/t401K and then 20K from Ibonds,Roth, Cash - and keep your taxable income below X $ ... It looks like you would be draining your post tax accounts early in your retirement....
I agree, taxes are definitely a consideration! Roth + I-Bonds currently total ~$780K. The house purchase would draw ~$120K - $220K of that, leaving ~$560K - $660K in Roth + I-Bonds. Then I would continue to convert ~$70K annually to increase Roth while decreasing eventual RMDs.

The way I see it (anybody please correct me if I'm missing anything), my options are:
- mortgage (possible, but I was leaning toward cash for simplicity and possible financial advantage)
- I Bonds (only ~$22K taxable)
- Roth (tax-free)
- tIRA/t401K (taxed at 22%)

Of course there are other options, such as winning the lottery (but I don't gamble), buy a less expensive house (but pickings are slim in this market), etc.
User avatar
celia
Posts: 14438
Joined: Sun Mar 09, 2008 6:32 am
Location: SoCal

Re: cash home purchase from I Bonds, Roth, and/or tIRA?

Post by celia »

VagabondJoe wrote: Wed May 11, 2022 3:24 pm
celia wrote: Wed May 11, 2022 1:57 pm In regards to the 12% tax bracket. It tops out at a Taxable Income of $83,500 this year. If you add back the standard deduction of $25,900 for this year, you can have an AGI of $109,400. If you have more than that, the excess will be taxed at 22% or Qualified Dividends at 15%.
Correct. As I wrote, I have about $20K remaining this year to top out 12%. So the next 22% marginal bracket would make taxable sources additionally costly vs. a Roth withdrawal.
Assuming you listed current values and have already accounted for living expenses for the first 4 or 5 months of this year, it looks like you need another $24K for living expenses for this year (or $30k if you closed on a house tomorrow). I will also plan for a $500K house. If there are bidding wars or bids over list price in your area, an all-cash offer will make your bid more appealing and help the sale close faster. Part of my suggestion below is a mental accounting (which assets are used for what) but it will make things easier to understand.

From now on, take half of your living expenses from the High Yield Savings Account and half from tax-deferred retirement accounts so the HYSA lasts for a while. For the rest of the year, that will be $12K from each, but after you buy a house and your expenses increase, it could be $20K from each.

Then I suggest for the $500K house, use
200k from HYSA
180k from I bonds (all of them)
120k from Roth

The reason is to have some HYSA left for a few more years as it is not taxed that much (just some interest). With all the I bonds gone, you may want some more bonds in the tax-deferred accounts to maintain your desired Asset allocation. (I assume you were cash-heavy so that you could buy a house eventually.)

Since you will then be left primarily with retirement accounts, I encourage you to continue doing Roth conversions, particularly this year AFTER the market drops some more. You may have to withhold part of the conversions for taxes, unless you would rather spend down the HYSA. I would continue doing Roth conversions until you get to the top of the 22% bracket. My post in this thread explains how the rest of the conversions for this year could end up effectively being taxed at 11%. But you will have to figure out where to pay the taxes from (either pre-tax or post-tax retirement accounts).

By the way, I appreciate how you organized the exact data we needed. It is easy to comprehend and saved me time in the analysis with only four assets to consider. Please run all the relevant numbers through tax software before making a big move as you should be prepared for the taxes.
Topic Author
VagabondJoe
Posts: 6
Joined: Tue May 10, 2022 2:55 pm

Re: cash home purchase from I Bonds, Roth, and/or tIRA?

Post by VagabondJoe »

celia wrote: Thu May 12, 2022 1:08 pm From now on, take half of your living expenses from the High Yield Savings Account and half from tax-deferred retirement accounts so the HYSA lasts for a while ... Then I suggest for the $500K house, use
200k from HYSA
180k from I bonds (all of them)
120k from Roth

... I would continue doing Roth conversions until you get to the top of the 22% bracket ...
Thank you very much for the time and thought you obviously expended to provide very specific and sound recommendations, which I intend to follow. The only one I wasn't expecting was Roth conversions to the top of the 22% bracket.
celia wrote: Thu May 12, 2022 1:08 pm By the way, I appreciate how you organized the exact data we needed. It is easy to comprehend and saved me time in the analysis with only four assets to consider.
Thanks. Although this is the first topic I've posted, I have learned much in reading this forum over the past couple of years, including that good input is more likely to yield good responses (the converse of "Garbage In, Garbage Out")! All assumptions employed in your analysis were correct, by the way.
User avatar
celia
Posts: 14438
Joined: Sun Mar 09, 2008 6:32 am
Location: SoCal

Re: cash home purchase from I Bonds, Roth, and/or tIRA?

Post by celia »

OP, don’t follow my recommendation until others have a chance to critique it. (That is the best part of public posting— you can get multiple suggestions and the first one might not be the best.).

However, although this question is fairly simple with only a few variables, there might be something I’m overlooking like tax credits or another kind of lending, other than a mortgage. I’m ok with tossing out an idea and seeing others improve on it or tear it apart.

The bigger Roth contribution is a “freebie idea” as I had just finished typing the referenced post when I read yours for my second comment.
Post Reply