My wife and I (we're both late 30s) just had our offer accepted by the sellers and was wondering which account to draw from for the down payment? What would be the most tax efficient way that would also maximize our finances for retirement?
We're going to need about $200k – $250k for down payment and renovations. Our HHI is about 300k. I was thinking 2/3 from brokerage account by selling some of the ETFs, mutual funds, and various misc. individual stocks, and maybe 1/3 from our HSA. We just used our credit cards for all medical expenses and could possibly use the EOBs to reimburse ourselves tax free.
We have the balance in following:
Cash: 50k
Brokerage (invested in various funds): 400k
Roth IRA : 200k
HSA: 150k
Roth 401k: 500k
Regular 401k: 400k
Which Account to Draw from for Mortgage Down Payment?
byu/New_Razzmatazz_9064 inpersonalfinance
Posted by New_Razzmatazz_9064
4 Comments
Because HSA appreciation is tax free the most tax efficient would be to pay entirely with the brokerage.
401ks and IRAs shouldn’t even be on the table for this question.
If the $50k is all the cash you have, then I’d leave that alone as an emergency fund + maintenance fund. $50k may even be on the low side depending on expenses.
You *could* cash out some of the HSA via reimbursements, but I personally wouldn’t. It’s extremely valuable tax advantaged space that you can’t get back.
I would just pull the amount required from the after tax brokerage (and don’t forget about taxes.)
Oh man this is going to be an unpopular opinion.
Roth contributions have already been taxed. So you can pull those funds without penalty or taxed (capital gain).
So if there’s sufficient there to get your down payment along with your cash you can take it from there.
You can pull from the brokerage but you want to be cognizant of the tax lots you sell to minimize capital gains. You’d probably want to sell assets at a loss, zero gain, long term capital gains; in that order.
Losses will provide a deduction against the gains, and I you have enough you may end up with a deduction.
Now… I’ve made this case before and it’s controversial. Traditional retirement vehicles are better than Roth (with the backdoor being the exception).
If you’re moderate earners and in a 24% tax bracket then every dollar of Roth contribution was post tax, and not accounting for FICA has actually cost you $1.24.
So you have to earn 24% before breaking even. Then you have to outpace inflation and have sufficient growth so that the tax free benefit (of the growth only) is sufficient to have made the investment worth it. Additionally if you’re a conservative investor you’ll have stagnant growth by design. So it really benefits Roth investors to be risk tolerant.
Conversely a traditional contribution nets you a deduction. So that dollar contribution, will immediately net you a $0.24 savings on your income taxes in the year that it was made. It only cost you $0.74; you’re INSTANTLY in the black.
If I put $1,000.00 in my traditional 401k, then I effectively have $240.00 extra the next tax year. I can roll that into a non qualified standard brokerage account, or contribute it to my traditional retirement vehicle next year (getting additional tax savings on money I wouldn’t have otherwise had), OR even do a small Roth contribution.
Done with these things in mind as strategies, I’m fairly certain traditional retirement vehicle investors can end up with significantly more wealth during retirement.
I recognize if you’re a high wage earner without an employer sponsored plan, a traditional 401k or other similar vehicle may not be available to you, but if it is; then your savings are that much higher.
Since you are already expecting to be above the 0% long term capital gains rate, as long as you remain in the 15% long term capital gains rate and your withdraw is all long term capital gains, I would lean toward 100% (tax included) from the brokerage account. You might pick and choose based upon which investments have less gains to lessen the tax hit.
I would rather let the advantages of HSA grow untouched.