Does it make sense for a retired couple to withdraw 401(k) money to pay cash for a house?[ Edited ]
My wife and I are over 60. We currently rent however we are considering buying a home in a different community to be closer to our daughter and help take care of our granddaughter. Does it make sense to withdraw from our 401k and pay cash for the house?
Probably not all at once…unless you’re interested in helping out the government with some extra tax revenue!
Withdrawing over time may cost less
All kidding aside, you should know that a withdrawal from a pre-tax 401(k) will generally be 100% taxable as ordinary income. For example, if your other taxable income for the year is $50,000 and you take $200,000 out for the house, your income tax bill for the year will essentially be as though you made $250,000. Though I don’t know the details of your situation or how much you’d need to withdraw, I’m guessing that taking the money all at once would result in you paying more taxes on these dollars than if you pulled the money out over time instead. Consequently, it may be smarter to spread your withdrawals over multiple years so that you lose less to taxes.
Will enough be left over?
Another big thing to think about here is whether or not trading 401(k) assets for home equity is in your best long-term retirement interest. If you buy the house with cash and later decide you need those funds, you’ll have to take out some sort of mortgage or equity loan to access the money. On the other hand, if your remaining portfolio balance (after the withdrawal) would be large enough that it would be unlikely you’d ever need to access the equity in your home, then this wouldn’t be as big of a deal. So the big question is, would you have enough left over after you pulled out the money for the house?
Portfolio return vs. home loan cost
Finally, you should also look at how much you’d expect to earn on your portfolio over time (given your investment style and tolerance for risk) and compare that to the interest rate you’d have to pay on a mortgage if you didn’t buy the home with cash. If your expected 401(k) return is less than the interest rate you’d have to pay on a mortgage, this would support the “pay cash” argument. If the opposite was true, and you would expect to earn more on the 401(k) balance than you'd be paying in mortgage interest, that would support the “stay invested” argument.
Get some big picture help
In the end I really think your best bet here is to consider these points I’ve laid out and then use them as the basis for a conversation with a financial planner. There’s actually a lot to consider for this seemingly simple question and unfortunately, I don’t have enough information about your situation to give you a definitive answer. If you don’t already have someone with whom you work, our Financial Advisors here at USAA should be able to offer some assistance. They can be reached at 800-771-9960.
Thanks so much for your question. I hope this has been helpful and I wish you all the best!