Author Topic: Down payment cash - high tax bracket  (Read 168 times)

Wintergreen78

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Down payment cash - high tax bracket
« on: February 22, 2021, 11:01:51 PM »
So I just started a new job this year and may buy a house around the end of the year. My job doesnít allow me to contribute to a 401k this year. I live in a HCOL area. HereĒs the numbers:

Age: 42
Expected house price: $700,000
Gross Income: $115,00
20% down payment: $140,000

Current cash: $85,000 (so I need another $55,000 plus figure another $15-20,000 for additional costs associated with the purchase).
Taxable account: $395,000 - most investments are up 50% or more over the cost basis, all long term capital gains
Roth IRA: $170,000
457: $355,000

I also have a pension from my previous job that will pay about $26,000/year beginning at 50.

So, my first thought is to save cash this year, then get the rest by selling taxable investments. Iíll have to pay LTCG at 15% plus California income tax at 9.3%. My other option would be to pull from my Roth, since this will likely be my highest tax bracket year ever. Next year I can max out my 401k and begin contributing to either a Roth or tradIRA (whichever makes the most sense based on my bracket).

Iíve always thought of my Roth as something I wouldnít touch until I had spent down my taxable funds, but if I end up needing $30,000, that works out to $15,000 in LTCG and an additional ~$4,000 in taxes. Thatís not the end of the world, but it has got me thinking that this year might be a good year to pull from my Roth. In retirement my tax rate will be lower, so my LTCG taxes from my taxable investments will be less, even with another 10+ years of returns.

Tell me why pulling from my Roth is a horrible idea.

renata ricotta

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Re: Down payment cash - high tax bracket
« Reply #1 on: February 23, 2021, 09:19:24 AM »
I'm in a really similar situation, so posting to follow!

For me, I need to pull about $208k for my down payment + closing costs on what many would consider a facepunchy single family house in a HCOL area of Southern California. Escrow closes in about 20 days from now. I had been planning to get it all out of my brokerage account (posting separately on which cost basis is best in my situation), and hadn't considered taking out Roth contributions (about $20k available).

ysette9

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Re: Down payment cash - high tax bracket
« Reply #2 on: February 23, 2021, 10:21:16 AM »
Personally I think Roth money should be the last thing you touch unless you are looking at losing the roof over your head and the ability to put food on the table. That tax-protected space is so valuable as it will grow tax-free for as long as you live (and for some time after). You also can never get the space back once you pull it out. Again, personally, I donít think a down payment is strong enough of an incentive to take that money out. Save longer, buy less, donít buy, whatever.... donít touch the Roth money.

Just my opinion.

Wintergreen78

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Re: Down payment cash - high tax bracket
« Reply #3 on: February 23, 2021, 11:08:47 PM »
So, Iím assuming that whether I pull from taxable now or in retirement, Iíll end up paying LTCG taxes on at least part of my gains. My pension will count as taxable income, so Iíd have $14,000/year more I could earn before paying LTCG taxes. Then my California taxes would probably be in the 6% or 8% bracket instead of 9.3%. So, if I pull from taxable now Iíll definitely pay LTCG taxes on the whole amount and Iíll pay California taxes at a few percentage points higher. So, pulling from the Roth will definitely save me taxes now and allow me to pay a lower tax rate on the LTCG when I do realize them.

The counter argument is that by selling from the Roth now Iíll end up paying more in taxes each year from my dividends from my taxable account and Iíll (hopefully) have more taxable LTCG when I do eventually sell. I think you could run a bunch of scenarios assuming different investment returns and taxable income levels to try and optimize this, but Iím skeptical of trying to analyze things too closely when they will take a decade or more to play out.

Ysette9: I had the same attitude as you, which us why it feels weird to me to be considering it, but if my tax rate will be lower in the future I think I need to think this through and decide if it is worth breaking that rule.