401k for 2nd home or stop contributing and save

[longrun]

I'm 5-7 years from retirement in USA and would like to have money available for down payment on a 2nd home (750k range). Currently we have 900k (inc 170k Roth) in all retirement funds. We will have 100k in pension income and no mortgage on primary home. We defer just enough income to be eligible to still contribute to our  Roths which we max out. Does it make sense to stop deferring and instead save for the down payment? Tax bracket will go from 22 to 24% as of now. We have 20k in non-retirement savings now. I am thinking of stopping the deferred income (there's no match) and putting it into a brokerage account and paying capital gains on withdrawal. Thoughts?

[fareastwarriors]

Do you have a decent size taxable account? I use margin (like 30%) on my taxable to fund my down payment since I didn't want to stop investing and definitely didn't want to sell.

 

Do you plan to have 2 homes when you retire or you are selling your current home?

[longrun]

Only 8k in my brokerage account. Everything has been going into tax deferred and Roth. I plan on keeping my current residence.

[LC]

Just FYI - all contributions to your Roth IRAs can be withdrawn at any time, free of charge.

 

Assuming you need $150k for the 20% down pmt:

 

5 years of roth contributions (12k/year) = 60k

Non-retirement savings = 20k

 

Now you only need to come up with 70k.

 

I assume the current funds in your Roths are part contributions/part investment gains

 

So you can withdraw all your Roth contributions; any excess you can take a loan out against your first home.

 

Also, you can defer less and still contribute to the Roths - i.e. backdoor Roth contribution (contribute to a regular IRA, then "convert" this to a Roth by paying taxes on the contributions). This gets around the income limits for the Roth.

[thepupil]

How much is your primary home worth?

 

How old are you?

 

 

[longrun]

Thanks LC. I was thinking about the backdoor too. Maybe the best answer is to just use my Roth for the house. It seems strange to think about  taking money out after years of putting money in trying to prepare for retirement.

[longrun]

My primary home is worth 500k, I am 61.

[fareastwarriors]

My primary home is worth 500k, I am 61.

 

Why support 2 houses in your retirement? It seems like even if you can comfortably buy the 2nd, the ongoing expenses will be substantially higher than what you're paying now.

 

[longrun]

Warrior, the second house is a vacation spot near skiing in the mountains large enough for my kids and grand kids to stay and visit but I wouldn't relocate there permanently. 

[thepupil]

My primary home is worth 500k, I am 61.

 

So the entirety of your roth is available tax free to withdraw because you are over 59.5, not that you should do so.

 

So right now you have:

$500K primary residence

$900K tax advantaged vehicles, $170K off which is roth $730K of which is traditional

 

I don't know your expenses. Owning $1.25mm of house w/ 2 sets of property taxes/maintainanc etc. on $100K pension income + 3-4% of what your investments throw off/will throw off seems like a lot to me. I'm going to assume you've done the math and it will look better after 5-7 years of contributions to the investments. the math will vary, but to me that means $5-15K / maintainance / year and $10K or more of property taxes

 

Assuming all the math works, I wouldn't stop contributing. You have lots of ways to raise funds in a tax efficient manner ( borrowing against your $500K primary residence and $170K of roth) should you decide to do something like buy another house.

 

I'd probably go to bogleheads and ask for advice on this topic. COBF is for stock punters, not actual financial  planning!

 

[longrun]

Thank you Pupil. My thought is to own the vacation property for 10 years and then sell and go back to just a primary home. and thanks for the bogle recommendation.

[stahleyp]

Why not take out a home equity line or mortgage on the first property?

[SharperDingaan]

Key consideration here is a planned sale within X years.

It is not intended as a 'legacy' property, but to get best use out of it - you need to have the kids/grandkids visit (& use the place) ROUTINELY, not once in a while. They also need to be visiting Summer AND Winter, and NOT just over the holidays.

 

Talk to those in their 70's. Ask them if they would do it the same way again - the practicality, NOT the memories.

It's often a lot smarter to just rent the same place for 2-3 months every winter, and a different place in the summer. Sharing the rent with another family, as well as your own. If your family can't make it one year - do a shorter stay at the ski lodge, and don't rent the chalet.

 

Keep in mind that you could also do a one-time rent/share of a furnished island villa (Canaries, Caribbean, Greece, Turkey, Polynesia, etc) for 1-3 months. Alternatively a major city (Buenos Ares, Barcelona, Casablanca, Lisbon, etc). Get to/fro via ship &/or direct flight, and a different location every year. Ski 3 months, travel 3 months, stay at home 6 months.

 

Just because others own a vacation property, doesn't make it smart.

 

SD

 

.

[Gregmal]

A vacation property is awesome if you use it enough. But the truth is that when you are not using it, its a total drag on your finances and more of a headache than a joy. So you have to weigh that out. Assuming you arent renting it out, its a total write-off. That you cant write off.

 

If you do not intend to own longer term, I'd stick to renting, although then you have to deal with the inconvenience of seasonal rates, availability, and lugging back and forth all your stuff.

 

It also comes down to what you're looking to buy. I know plenty of folks who live in million dollar homes that own $150-200k vacation homes in the Poconos/Adirondacks. Is it a palace you're buying, or just a place to rest while you enjoy the area? $200k in a tax friendly state, on a home that you dont need to be in tip top shape....much more doable than if you're looking for a second home type vacation place.