using retirement funds to buy a house

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phecksel's picture
phecksel
Status: Silver Member (Offline)
Joined: May 24 2010
Posts: 204
using retirement funds to buy a house

Currently renting a house, which I can buy for below current market value.  House is extremely well built, but a bit larger than is required as the kids are floating in and out with college.  Lot is small, but due to neighborhood arrangement, get a lot of rain run-off where the garden is located.

Positives

  • cuts property taxes down (rental properties have higher tax rates)
  • Lowers insurance costs (property insurance for rental is higher than owned, + the cost of renters insurance)
  • Eliminates the monthy payment (minus of course property taxes and insurance)
  • We would own it free and clear
  • making use of the money rather than watching it fritter away

Negatives

  • have no mobility, stuck in one location
  • paying taxes and penalties to the IRS
  • located in a suburb close to other people
  • limited land to farm
  • using retirement money today

What are some of the opinions here?

SteveW's picture
SteveW
Status: Gold Member (Offline)
Joined: Jan 21 2010
Posts: 490
buying a house

Looks like you've already assessed some aspects.

Other aspects include:

The price might be even lower in 2-3 years.

Borrow the money at all-time low interest for a mortgage (CM suggests either holding a house debt-free or with a large mortgage).

Put some retirement funds into PMs, if possible, for stabilty.

Don't allow too much of your net worth to be invested in real estate. I guess you're in the 45-55 age bracket so planning to have the home debt free at retirement and being about 50% of net worth at that time is a good proportion, in my opinion.

 

Wendy S. Delmater's picture
Wendy S. Delmater
Status: Diamond Member (Offline)
Joined: Dec 13 2009
Posts: 1988
to buy or not to buy?

phecksel wrote the italicized parts; my thoughts are in bold :

Currently renting a house, which I can buy for below current market value.  Just because it is a "good deal" does not mean it is the best deal.  House is extremely well built, (a positive, to be sure) but a bit larger than is required  (A serious negative in many ways: you have to heat and or cool the whole thing in a post peak oil world. This is an unnecessary expense - unless you expect to have grown kids living with you, which may be all the retirement plan many of us have if SS goes bellyup)  as the kids are floating in and out with college. See the "College as gateway to debt slavery" thread, please. Lot is small, How small? We have 1.5 acres with an 1100-sf house, and can barely make enough food to suplement our deep larder with fresh produce. If the SHTF, we can plant the whole fenced yard but with anything smaller we'd have very little coming out of our garden.  but due to neighborhood arrangement, gets a lot of rain run-off where the garden is located. Water is good; runnoff maybe not so good. Runnoff from where? Might it be contaminated? Runnoff from streets has lead and other chemicals.

Positives

  • cuts property taxes down (rental properties have higher tax rates) Where are you located? I live in SC, and taxes on the house are $500 a year - in NY they were $500 a month. Higher and lower taxes for your region may not compare to taxes for other regions.
  • Lowers insurance costs (property insurance for rental is higher than owned, + the cost of renters insurance) Higher and lower insurance for your region may not compare to insurance rates for other regions, as well.
  • Eliminates the monthy payment (minus of course property taxes and insurance) There will be no costly move, too.
  • We would own it free and clear So you will be able to buy it outright, and not hold a mortgage?  But this is not the only place you can buy, just one you are familiar with.
  • making use of the money rather than watching it fritter away I agree that owning a home free and clear is the way to go in uncertain times. Make sure to have enough PMs to pay severeral years worth of property taxes, though, and allow for inflation to raise those taxes.

Negatives

  • have no mobility, stuck in one location Yes. Is there a reason you used the word "stuck?" Because that is a telling word choice. 
  • paying taxes and penalties to the IRS How much? I took a 37% hit on early IRA withdrawals to get our house as sustainable as possible and do not regret it.
  • located in a suburb close to other people DO YOU KNOW THEM? Are you plugged into your community? This is, perhaps, the most important question of all. Most suburbanites do not know their neighbors. That sort of ingnorance will be dangerous, when coupled with  high population density. Here is a site to look at how your community stacks up.  I moved from an area with a population density of 3680 people per square mile (surounded by urban areas) to an area with a population density of 1179 people per square mile (surrounded by farms) and that many folks per square mile still makes a lot of my prepper friends nervous.  My suburban "homestead" works for me, but might not work for everyone.
  • limited land to farm Right. See above. 
  • using retirement money today All of it? If this is SOME of it, that would make more sense (and is what my husband and I did). On the other hand, if the US dollar falls apart, is that money really "saved" for later?

_________ Hope this helps!

Safewrite

phecksel's picture
phecksel
Status: Silver Member (Offline)
Joined: May 24 2010
Posts: 204
It will put a dent in

It will put a dent in retirement money, but there will still be a lot left over.

Portfolio is professionally managed, and I already know my advisor will have a caniption, but will follow my instructions.  PM in the retirement account is the one thing I don't understand how to accomplish.

Thought is to own the house free and clear.  State's taxes are limited and can't be raised beyond 2.8%(?) or inflation, whichever is lower.  Currently appealing to the state on the true value of the house and waiting for that decision before completing purchase.

This would put real estate at about 30%

Mixed bag of neighbors, enough trouble that if things collapse, it could get a bit ugly.  But, I hate people in general :)

phecksel's picture
phecksel
Status: Silver Member (Offline)
Joined: May 24 2010
Posts: 204
wrt being stuck, after a two

wrt being stuck, after a two year break from work, during which I earned an MBA and PMP certification, I keep thinking I'm way under utilized.  Directly owning property significantly reduces flexibility to relocate.

Wendy S. Delmater's picture
Wendy S. Delmater
Status: Diamond Member (Offline)
Joined: Dec 13 2009
Posts: 1988
PM in the retirement account

Your PMs for house taxes? I bought ours as silver coins at a coin dealer, cash: specifically, junk silver (pre 1963 dimes and quarters - and old silver dollars with no numusmatic value other than their silver content). If you buy physical gold or silver through a dealer via anything but cash you pay taxes on any appreciation as profits - and you have to pay someone to store gold unless you live in Fort Knox. A safe deposit box for small amounts of PMs might work, but if the bank goes under or (if it is in your retirement account) the threat of potential government confiscation kept us from going that route.  Not that we have much with our taxes here as low as they are. You said your taxes were limited to 2.8% of the value of the house, but what is the value? And what state are you in? The state's laws and resources and population should be a factor in your decsion. I now live in a state that has adquate water, a longer growing season, is gun-friendly (a self-defense issue), has low taxes and more sustainable power generation (hydro and nuclear as opposed to oil-fired plants).

Congrats on the MBA and the PMP certification. What sort of project management? I'm an engineer, so I am just curious.

One final thought: do not confuse the terms "house" and "home." A house is a rational purchase, an investment, a base of operations, and a studied choice. A  home is a place where you rest and have emotional safety, a place to recharge and renew, a place to gather with family around a common hearth or to retreat for space and privacy. Home buyer constantly have to be on guard against makin an emotional descion about a monetary asset. In my experience you can make just about any house a home, so choose intelligently.

phecksel's picture
phecksel
Status: Silver Member (Offline)
Joined: May 24 2010
Posts: 204
In my haste to write, I

In my haste to write, I wasn't clear...  Taxes can not increase year over year more than 2.8%.  By converting from renting to buying, I cut out 18 mills of taxes *$18 per thousand dollars of  value.

BSME/PE/MBA/PMP - lots of high level credentials, employers don't exactly know what to do with me.  PMP exam was tough, almost as tough as the PE exam.  I'm working in a large international organization, but once again, they really aren't sure what to do with me.  I keep getting special assignments.  I've learned a lot going through the MBA, but even more importantly, fine tuned the critical thinking skills.  I'm amazed to look around me and see how many people don't have the same vision I do.  It's like I have 20/15 vision, and most people start at 20/200.  I saw a huge train wreck at my employer several months ago.  The impact is just beginning to happen now, and people are standing around dumbfounded, or even worse, trying to fix it while it's happening {sigh}.

I got lucky during the MBA program, my finance prof was a retired exec VP from the federal reserve.  Talk about an interesting perspective on world macro economics!  That class was worth every penny and more!

Home is where the love is :)  I've only really gotten attached to one "thing" and two years later, I still miss that thing.  The house we're living in, even as a rental, has really turned into our home.

ao's picture
ao
Status: Diamond Member (Offline)
Joined: Feb 4 2009
Posts: 2220
just for the record
safewrite wrote:

 I bought ours as silver coins at a coin dealer, cash: specifically, junk silver (pre 1963 dimes and quarters - and old silver dollars with no numusmatic value other than their silver content). If you buy physical gold or silver through a dealer via anything but cash you pay taxes on any appreciation as profits - and you have to pay someone to store gold unless you live in Fort Knox.

safewrite,

Just for the record, it's pre-1965 dimes, quarters, and half dollars.

Also for the record, you are supposed to pay tax on any profit regardless of where your PMs are purchased.  There's no record if you pay cash but you are still legally obligated to pay taxes.  To not report any profit on your taxes just because there's no record is income tax evasion and not looked upon kindly by the IRS.  While smaller transactions may fly under the wire, larger transactions may not.  Personally, I'd rather not gamble with taking the risk.  All it takes is one party reporting you.  And in times of tight money, people will be seeking out these rewards more and more.  

Wendy S. Delmater's picture
Wendy S. Delmater
Status: Diamond Member (Offline)
Joined: Dec 13 2009
Posts: 1988
on the record

We bought our junk silver through a large online dealer, with receipts and everything, except for a couple of old silver dollars. If I had to get reciepts or dates for those two, I think I might have a problem - so yes, for those couple of silver dollars it might be difficult, but the rest are all public record and accounted for. Thank goodness it is not much, as I expect hyperinflation to cause huge gains that we will owe taxes on.  We are not heavily invested in PMs (no gold at all) and most of our "investments" are things like a well, inslulation, and other physical preps paid for with part of my IRA that I took early withdrawl on. Believe me, the IRS got their cut (and it was huge).

But I stand by what I said - the poster considering buying a home should consider setting aside enough PMs to pay property taxes. And that amount varies by location - widely. At least here they are not very large - in NY it was more like we rented our land from the state.

lacourre's picture
lacourre
Status: Bronze Member (Offline)
Joined: Dec 11 2008
Posts: 38
ao wrote: safewrite

 

What if you do not "make" a profit... say pm's buy a certain amount of groceries when you bought them, and when it comes time exchange them, you trade them for groceries (instead of cash).  But this time, they STILL buy the same amount of groceries.  Then it's a break even.... you haven't gained any profit or extra goods.   What are the rules on that?    (I am not trying to be argumentative.... I am just trying to gain understanding.  Many of the concepts here on CM are new and outside-the-box for me!)

Thanks!

 

Wendy S. Delmater's picture
Wendy S. Delmater
Status: Diamond Member (Offline)
Joined: Dec 13 2009
Posts: 1988
welcome

Dear lacourre,

Welcome to the forums and CM! Sadly, yes, PM holders will be responsible for  taxes on the "phantom gains" to the value of precious metals (PMs) as they go up in value. It's one of the main reasons I am not heavily invested in PMs. (That, and the fact that my husband and I think we will get more bang for your buck with food, water and energy resiliency.) But I still think it's a good idea to set aside enough silver to pay any property taxes.

Not to hijack the topic, but let's say phecksel (this is his thread, after all) buys this house he is renting, or another one. He sets it up as what I call a Suburban Homestead (if you use this term please credit me, as I am writing a book on it): with sustainable water, energy, food, and a home business that could work via barter if there is a collapse. If property taxes are not paid, the taxing agency can seize the home. This is not a good thing.

To me, setting aside enough money to pay the tax man is just common sense.

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