Higher Cost Home Purchase in Retirement

Hi Fools, 1st post here -

I plan to retire January 2023 at age 64 and move from SC to VA to be nearer my daughter. I will be selling my paid-off home for near $600K and expect to pay near $850K for a comparable home. I’m looking for best strategies on funding that $250K mortgage.

I am married and my wife is drawing ~$1,110/mo social security today. I may take my $2,500 SS upon retirement. In addition, we have (4) pensions worth $3,250/mo starting Jan 2024. My 401K is sitting at $1.5M. I have little available cash, maybe $25K.

My question is do I draw out of my 401K at a gradual basis and take out a 15 year loan for the $250K mortgage, or do I take out larger sums, pay be bigger initial tax hit and avoid the interest cost of a long loan. Or ???

Thanks in Advance -


Take a close look at the costs of RMDs in the future. At age 72, RMD will force you to begin distributions based on your age and life expectancy. If you expect to live to 92 (20 years after age 72), RMD distribution is 5% of your Jan 1 balance. It begins modestly and increases gradually but as you get older the numbers get large. And this is after all your other income and deductions. So you pay taxes at your highest incremental rate.

I’m not sure how this works in the case of a married couple, but I would suggest you look at working down the balance in your 401k any time you get a chance. Especially when you have a low income year. Roth conversion in low tax years is one way. As to mortgage yes or no, taxes on a large distribution from your 401k are likely to be expensive. So mortgage will probably be preferable but run the numbers and see what works best.

You can also do charitable distributions from your 401K or IRA as a way to reduce the balance but many do that later when they count toward your RMD.

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My RMD is $93K at age 72. What I’m looking for is the best logic behind “running the numbers.”

Another aspect to look at is borrowing funds from you 401k instead of taking out a mortgage to fund your new home. Doing so avoids paying income taxes on the money. What are the limits on borrowing and what are interest rates. How does that compare with the interest costs of a mortgage. It almost certainly will be less than the income taxes on taking the $250K out of your 401K. I don’t know your income tax rate but could be as high as 30% total of state and federal. That’s $75K in additional income taxes.

Similarly the $1.5MM in your 401K is taxable. Eventually the taxes must be paid. By you or by your heirs. At 30% that could come to $500K in taxes. So how do you work down that balance to minimize those taxes. Best you can do is work down the balance over time when your tax rate is favorable. Its a liability you can’t avoid.

Start with what your incremental income tax rate is this year. Add in state. Figure out where the breaks are and use all of the lower brackets each year. A spreadsheet could let you figure out how high to consume all the 401k before you get to forbidding RMDs.

And keep in mind that the Obama tax comes to play above about $200K for individuals or I think $250K for couples. That’s an additional 3.9% to the feds.

And by the way, the home owners exemption is $500K for couples. I hope your $600K selling price has cost high enough to keep you out of capital gains on that one.


Hi @goreb,

Before you go down the rabbit hole, you need to get some correct info to work with.

IF you and your wife’s ages are within 10 years of each other, you will most likely use the most common Uniform Lifetime Table in IRS Pub 590-B. Here is a link to a Fidelity article:

Note the RMD at age 72 is 3.649%, not 5%. The RMD on $2MM would be $72,980.

As far as a mortgage goes, I would probably get a 15 year on the $250K. If you are not in a city, I suggest going to an Ag credit association. Some in NC are AgCarolina, Carolina Farm Credit and Farm Credit of North Carolina. The rates are normally reasonable and each year you will receive a Patronage check back, often from 1 to 2 months of your payments.

When we bought this land, a phone call and some simple forms got us a $250K mortgage in 20 days with Christmas and New Year’s in the middle of it.

As far as borrowing from your 401K, you will need to talk with your plan admin. While many plans allow borrowing, fewer do after retirement. While the IRS does not prohibit it. most plans will require a pay-off or a distribution of the (loan) balance* when you leave employment with the company.

Does that help you?

All holdings and some statistics on my Fool profile page
https://community.fool.com/u/gdett2/activity (Click Expand)

*If you take a loan and have a balance of $100K remaining when you terminate employment, the loan would be “closed” and you would pay tax on a $100K distribution. Your 401K balance would be adjusted down to account for this distribution.


Have you looked at a lower cost house? Different neighborhood, smaller, etc.

Thanks for all the good info Paul. We have already picked the development and know that we will have to put $85K down (10%) to kick off construction sometime next year. Then the remaining 90% is paid at closing in 2024.

I made an error in my original post as I plan to retire in January 2024 not 2023. But I plan to start my home construction next year so I don’t have so long a bridge time to wait from selling my current home late next year to moving into my new home. Construction is estimated to be ~16mo. I will look into borrowing that $85K from my 401K while I’m still working rather than taking out a bank loan.

I will be retired when I need to pay the final 90% to close on the home so I’ll have control then. I expect I will have already rolled over my 401K to another IRA.

I’ll be 64 at retirement so I’ll have 7-8yrs to draw down my 401K into a Roth until the ‘forbidding’ RMDs hit. I won’t earn >$500K capital gains on the sale of my home so we’ll take advantage of the home owners exemption and we don’t earn enough to get hit by Obama’s 3.9% tax.

Hi GWPotter,

I’m moving from a 3850 sqft home to a 2600 sqft home. I may go a little smaller but the new home building cost will still run around $325/sq*ft just north of Richmond, VA.

325 per square foot in Richmond? Wow.

Hi gdett2,

Thanks for the Fidelity link. I used a random site on the web and they seem to have a bad calculator. Wifey and I are within 10 years so the table is valid.

Unfortunately, while I’ll be 25 miles from downtown Richmond, VA, I’ll still carry a Richmond address so the Ag Credit Assoc probably won’t work. I’ll continue to use my local SC credit union in retirement as I believe they carry good rates.

Good point regarding borrowing from a company 401K. I’ll be retired shortly after taking out my 10% $85K bridge loan so I won’t be able to fully pay off that loan within a few months.

So it appears that my best strategy is to take out a small $85K bridge loan from my local credit union next year, to kick off construction, then fund my larger loan through regular disbursements from my rolled over 401K. At the same time I need to begin converting as much of my rolled over 401K to a Roth watching my tax penalty as I ratchet up the tax rate tables. This also tells me that I might want to wait to take my SS until age 70 to delay my tax hit and help with earlier Roth rollovers.

You’re going to need to raise more cash (than the $25K + $85K down) than you have right now. That is because construction inevitably hits various snags that requires money to fix. Otherwise you risk multiple delays i construction that also end up costing you money. Even if you have a “fixed price” contract with your contractor, there will still be all sorts of unforeseen costs that you will incur along the way.

This is not the LBYM board, but living in a $850k house with $1.5M+$3250/mo+$1110/mo+your Social Security coming later appears to be pushing it.

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At 4% that $1.5MM should generate $60000/yr or $5000/mo. That gives total income near $10k per month or $120k/yr. That should be a comfortable retirement for most of us.

Depending on your expectations about what constitutes comfortable, and what you envision retirement to be like. For many it is finally having time and freedom to do things long put off, and many such things take money. And it can be more so with a couple enjoying retirement together.


Yes! But most of us don’t live in a $850k house. The property taxes alone will probably be $10k/yr (in VA). And the amount needed to save for average maintenance costs will probably be $3000-3500/yr. I don’t what insurance is in VA. But housing alone could come to over 25% of net income each year. In retirement!!!


Free will. Like Markr, I would not retire in an $850k house with that financial picture. I would want a little more hedge against future stock crashes, inflation, deflation, etc. But you will probably be fine.We retired with half as much house and a bit more in financial assets and pensions, but that’s because we are risk averse