Should I try to use 401k, 403b money to buy a 2nd House?

[Microman]

Wife thinks that home prices are at a low.

She would like to buy a 2nd place, and possibly have our son rent.

We have some cash, but not enough even for 20 percent down.

We see all that money that is in 401k, Ira's, and 403b's.. and think if there was someway to use that money, that we would use it to put big down payment on a place here in Southern California.

We are up there in age....And since this money has never had tax paid, I am sure it would put us in a 35% tax or higher tax bracker on the year we get the money.

Question: is this a stupid idea? Is there any reason I should consider this?

Thanks..

[thermarest]

At the root of it, this is a bet on weather real estate as an investment will outperform whatever your 401(k) is in now (stock?), with the real estate bet also being handicapped some percentage by taxes. Might happen. Might not. Banking on your son as a renter sounds like a horrible idea.

[mattkime]

this doesn't sound like an investment strategy.

yes, home prices are relatively low but a mortgage is still a long term investment.

[SDGuy]

Microman wrote:
Question: is this a stupid idea?

Yes.

On a somewhat related note - to purchase additional real estate, I've always done cash-out refinancings (assuming you have equity in your residence). With current interest rates right around 5%, this is nearly free money (figure tax benefit will be about 1/3 of that, and an inflation rate of 3%). Even if the new rental property comes out to have a zero cash flow (expenses = income), the deductible tax benefits (mostly mortgage interest and property taxes) as well as depreciation will make your overall cash flow positive. A few things to keep in mind, though - only get fixed rate mortgages, don't max out your primary residence mortgage, and only buy property in a good location (low crime, attractive to potential tenants because of nearby amenities/commute, whatever local factors apply to your area). Owning rental property is not something to be taken lightly.

[Speedy]

Bad idea. Keep your retirement safe.

[Wailer]

Personally, I would never touch 401k or IRA money (especially roth) unless I needed to or I was subject to the MRD (mandatory retirement distribution). Money growing tax-deferred (or tax-free in the case of a Roth) is an invaluable tax-shelter. And if you want to leave an asset to your kids, there is NOTHING better than a stretch IRA that could potentially pay them millions over their lifetime.

That being said, if you want to take the money out for whatever purpose, you should do so as tax efficiently as possible. I would almost say no situation is worth paying the 10% early distribution penalty for those under 59.5 years old. Paying 35% federal tax today (and don't forget CA state tax) on it isn't that bad if you believe tax rates are going higher. Obviously it would be better to take out small chunks each year at a lower rate or 0% rate.

Now as far as buying a 2nd home, I wouldn't. Unless you are very wealthy, a 2nd home is a major expense. Even if you can pay cash, you still have taxes, insurance and maintenance. Maybe in your housing market the cap rates on homes are 8% or better, but around me, most homes rent for 2-3% of their fair market value.

I think you are better off renting a place for your son and paying for it with a slow, tax efficient withdrawal of your 401k. Not to sound harsh, but if your son can't save enough for the downpayment on a home, does he really need a home?

[N-OS X-tasy!]

I believe you can borrow against a 401(k) to purchase a first house, but not a second.

[zero]

Microman wrote:

We see all that money that is in 401k, Ira's, and 403b's.. and think if there was someway to use that money

We are up there in age....

Here is an idea: Use it for retirement

[M>B>]

NO!

He should do this like most of us do...

Rent, save, rent, save, rent, save, down payment, pay, pay, pay, and then own!

How old is he and where is he in life? Sounds like he still has a lot to learn.

[AlphaDog]

Microman wrote:
We have some cash, but not enough even for 20 percent down.

We see all that money that is in 401k, Ira's, and 403b's.. and think if there was someway to use that money, that we would use it to put big down payment on a place here in Southern California.

We are up there in age....
Thanks..

At first this post sounded pretty strange to me, and then I had another thought. Is the point of stretching now to buy a second house the fact that you won't want to live in your current home when you retire but don't feel this is a good time to sell you're in? My first read made it sound like you just wanted to cash out the investments and buy another house because you could get one cheap. Yes? No?

If yes, I do think that's a bad idea. If no, then... Maybe. As long as you don't think of buying a second house as a way to "reinvest" what you've now got in retirement accounts.