Which retirement account should I take money from?

Q&A - Which retirement account should I take money from?

Question

Dear Stephen,

We have identified a house which isn’t on the market yet but will be soon.  The asking price will probably be 1.5 million and I want to put $650,000 down on it.

My question is where/how do I take my money out for the down payment?  

My retirement accounts are worth $1,850,000:  The breakdown is $1,575,000 in my Traditional TSP and $275,000 in my Roth.

I have $350,000 in cash from the sale of our previous house and I also have $130,000-$140,000 more cash in another account. 

This leaves me with roughly $150,000 to take out of my retirement accounts. 

How do I take it out? Is it a percentage mix between Traditional and Roth or just dependent on how much tax liability I want to take on for a particular year?

I know realizing so much income will increase my Medicare premiums, and obviously taking from the traditional will increase my taxes.

Thank you for any assistance you can give me with this question.

All the best,

Answer

I understand your question, but may I ask a counter-question – Do you need to put down $650k at once?  $650k is way more than the standard 20%.

If you think about it, if you put down 20% (which is $300k) at the start, and the remaining $350k that you’d like to put down you spread over multiple years, that will keep your tax and Medicare considerations at bay.  

(On a side note – Roth distributions will not increase your Medicare premiums anyhow, so long as they are non-taxable Roth distributions).

Ultimately, if you need to put down more of a down payment, you are correct – it will come down to the tax liability you are comfortable with, but…

Let me add this, since you are retired you are currently in one of the lowest – if not the lowest – tax bracket you will ever be in.  Tax rates are scheduled to go up in 2025.

With this in mind, I would lean towards taking it from your Traditional, not your Roth.  Take as much from your Traditional as you can to fill the 24% tax bracket, and not spill into the 32% bracket.  I would want you to avoid the 32% bracket.  

I hope this makes sense,

Stephen

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