Using Taxable Brokerage Account to Buy Vacation Home

[Anonymous]

So we own our home outright in NOVA valued at about $850K. We have about $1M in retirement accounts. $200K in high interest savings. Money in 529s, HSAs, I-Bonds. We also have about $800K in taxable brokerage account. We are 50 year old couple with two teenage boys and are thinking about getting a lake house for around $500K. I'm not even sure why I feel like $500K is the number but that's what we are thinking. My question is...with mortgage rates so high, I was thinking of using the money in my brokerage account to just buy the 2nd home outright. What are the pros and cons to this? I was originally thinking...oh no, I don't want to spend my brokerage account, but am I really? or am I really just reallocating away from the stock market to real estate? I mean the 2nd house is still an asset (hopefully an appreciating one)...so is the only risk whether the real estate market does as well as the stock market? Granted you can't put a dollar amount on how nice it will be to vacation here but there will also be a lot of expenses with the 2nd home. We'd hope to rent it when we could. The idea would be to eventually sell the NOVA home and retire to the 2nd home. Any thoughts are welcome.

Lastly, how do I figure out how much tax I would owe on the money I would need to withdraw from the taxable account?

Thanks

[Anonymous]

I wouldn't. Just ride out until your feeling goes away

[Anonymous]

The only cons I can think of is trading liquidity for illiquidity and incurring tax if you realizd capital gains.

As for taxes, not enough information to know. What’s the basis, how long have the funds been invested, etc.

[Anonymous]

Anonymous wrote:The only cons I can think of is trading liquidity for illiquidity and incurring tax if you realizd capital gains.

As for taxes, not enough information to know. What’s the basis, how long have the funds been invested, etc.

Thanks. I guess my question is how to I determine what my tax would be. So basically I've been adding a little to this account every month for about 25 years. I started with $50/month and increased it over time to as high as $2000/month and now I'm down to $250 a month as I'm putting more money into 529s. This account is mostly invested in the Vanguard Total Stock Index Fund. Thanks.

[Anonymous]

On an index fund you pay some tax along the way. Look at your statements. It should show your cost basis. The tax will be 20% of the long term gains.

Probably not smart to sell but you need to run the numbers to compare your options.

[Anonymous]

Personal decision OP, and there is nothing wrong with either option.

I always err on the side of taking on debt for things like this - I like to keep my liquid funds liquid, so I can use them for emergencies or other investment opportunities that may arise, or for luxuries that I have to pay for 100% upfront.

You might want to consider that interest rates will (probably?) decline in the long run, so you might be able to refinance at a lower rate down the road, reducing your monthly costs.

Mortgage interest deductions revert to higher levels at the end of 2025, barring some kind of further legislation from Congress.

God forbid property values plummet, in a dire scenario you can walk away from a mortgage and lose only the down payment.

[Anonymous]

Anonymous wrote:So we own our home outright in NOVA valued at about $850K. We have about $1M in retirement accounts. $200K in high interest savings. Money in 529s, HSAs, I-Bonds. We also have about $800K in taxable brokerage account. We are 50 year old couple with two teenage boys and are thinking about getting a lake house for around $500K. I'm not even sure why I feel like $500K is the number but that's what we are thinking. My question is...with mortgage rates so high, I was thinking of using the money in my brokerage account to just buy the 2nd home outright. What are the pros and cons to this? I was originally thinking...oh no, I don't want to spend my brokerage account, but am I really? or am I really just reallocating away from the stock market to real estate? I mean the 2nd house is still an asset (hopefully an appreciating one)...so is the only risk whether the real estate market does as well as the stock market? Granted you can't put a dollar amount on how nice it will be to vacation here but there will also be a lot of expenses with the 2nd home. We'd hope to rent it when we could. The idea would be to eventually sell the NOVA home and retire to the 2nd home. Any thoughts are welcome.

Lastly, how do I figure out how much tax I would owe on the money I would need to withdraw from the taxable account?

Thanks

Not sure why you had to list all your financial stats but what it really comes down to is do you think the returns on the money staying in your brokerage account will be greater than the mortgage interest rate if you took out a mortgage to buy the lake house. Of course owning a home outright has some psychological value and peace of mind.

[Anonymous]

Anonymous wrote:So we own our home outright in NOVA valued at about $850K. We have about $1M in retirement accounts. $200K in high interest savings. Money in 529s, HSAs, I-Bonds. We also have about $800K in taxable brokerage account. We are 50 year old couple with two teenage boys and are thinking about getting a lake house for around $500K. I'm not even sure why I feel like $500K is the number but that's what we are thinking. My question is...with mortgage rates so high, I was thinking of using the money in my brokerage account to just buy the 2nd home outright. What are the pros and cons to this? I was originally thinking...oh no, I don't want to spend my brokerage account, but am I really? or am I really just reallocating away from the stock market to real estate? I mean the 2nd house is still an asset (hopefully an appreciating one)...so is the only risk whether the real estate market does as well as the stock market? Granted you can't put a dollar amount on how nice it will be to vacation here but there will also be a lot of expenses with the 2nd home. We'd hope to rent it when we could. The idea would be to eventually sell the NOVA home and retire to the 2nd home. Any thoughts are welcome.

Lastly, how do I figure out how much tax I would owe on the money I would need to withdraw from the taxable account?

Thanks

Regarding your tax question, would they be capital gains? If so, are they long term (held a year or longer) or short term capital gains? Short term capital gains are taxed at normal income tax rates so depends on your MAGI. Long term capital gains taxes vary between 0%, 15%, and 20% depending on your overall MAGI. Also don't forget about the Net Investment Income Tax (NIIT) of 3.8% on any investment income including capital gains, dividends, interest, etc if your MAGI is over $250K (MFJ). You can thank Obama for the NIIT which is just another forced redistribution of wealth.

[Anonymous]

Anonymous wrote:I wouldn't. Just ride out until your feeling goes away

Why not?

[Anonymous]

Will you retire to the lake house? Usually i know folks who get vacation houses when their kids are very young so they can enjoy it as a family or when they are ready to retire.

[Anonymous]

Anonymous wrote:

Anonymous wrote:So we own our home outright in NOVA valued at about $850K. We have about $1M in retirement accounts. $200K in high interest savings. Money in 529s, HSAs, I-Bonds. We also have about $800K in taxable brokerage account. We are 50 year old couple with two teenage boys and are thinking about getting a lake house for around $500K. I'm not even sure why I feel like $500K is the number but that's what we are thinking. My question is...with mortgage rates so high, I was thinking of using the money in my brokerage account to just buy the 2nd home outright. What are the pros and cons to this? I was originally thinking...oh no, I don't want to spend my brokerage account, but am I really? or am I really just reallocating away from the stock market to real estate? I mean the 2nd house is still an asset (hopefully an appreciating one)...so is the only risk whether the real estate market does as well as the stock market? Granted you can't put a dollar amount on how nice it will be to vacation here but there will also be a lot of expenses with the 2nd home. We'd hope to rent it when we could. The idea would be to eventually sell the NOVA home and retire to the 2nd home. Any thoughts are welcome.

Lastly, how do I figure out how much tax I would owe on the money I would need to withdraw from the taxable account?

Thanks

Not sure why you had to list all your financial stats but what it really comes down to is do you think the returns on the money staying in your brokerage account will be greater than the mortgage interest rate if you took out a mortgage to buy the lake house. Of course owning a home outright has some psychological value and peace of mind.

But it also brings alot more expenses than just the mortgage. Utilities, Upkeep, furniture, taxes, toys for the water, everything else you need to live in a 2nd home...kitchenware, home office maybe, etc etc. etc. Will the rental income that you might get make up for these expenses is another question you need to ask yourself?

[Anonymous]

Anonymous wrote:Will you retire to the lake house? Usually i know folks who get vacation houses when their kids are very young so they can enjoy it as a family or when they are ready to retire.

That would be the plan but we are not sure where the kids will settle down after college, which is several years away, so that may factor into the decision of where we retire to.

[Anonymous]

Anonymous wrote:

Anonymous wrote:I wouldn't. Just ride out until your feeling goes away

Why not?

Because these things are like 'mid-life crisis" wants. They come and go. OP is thinking that taking the weekend off and spending the weekend on a nice quiet get-away home w/ spouse and their two teenage kids. Like a dream vacation. In reality, that's highly unlikely. Kids want to do what they want to do, not being told what they are doing in coming weekend. The weekend to-do items never go away which means every time you spend wkd away, your to-do list only get longer. Also, from $ standpoint, OP still have a big future liability that has not been realized - kids college cost. Also, their retirement fund is low (only 1 million). I am assuming OP has a pension because 1 mil at age 50 w/o pension and two kids heading to college sounds pretty shaky to me. That's why not.

[Anonymous]

Anonymous wrote:Personal decision OP, and there is nothing wrong with either option.

I always err on the side of taking on debt for things like this - I like to keep my liquid funds liquid, so I can use them for emergencies or other investment opportunities that may arise, or for luxuries that I have to pay for 100% upfront.

You might want to consider that interest rates will (probably?) decline in the long run, so you might be able to refinance at a lower rate down the road, reducing your monthly costs.

Mortgage interest deductions revert to higher levels at the end of 2025, barring some kind of further legislation from Congress.

God forbid property values plummet, in a dire scenario you can walk away from a mortgage and lose only the down payment.

Another advantage of mortgage is that if you rent the place out (which your post says you will), you can deduct the interest expenses.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:I wouldn't. Just ride out until your feeling goes away

Why not?

Because these things are like 'mid-life crisis" wants. They come and go. OP is thinking that taking the weekend off and spending the weekend on a nice quiet get-away home w/ spouse and their two teenage kids. Like a dream vacation. In reality, that's highly unlikely. Kids want to do what they want to do, not being told what they are doing in coming weekend. The weekend to-do items never go away which means every time you spend wkd away, your to-do list only get longer. Also, from $ standpoint, OP still have a big future liability that has not been realized - kids college cost. Also, their retirement fund is low (only 1 million). I am assuming OP has a pension because 1 mil at age 50 w/o pension and two kids heading to college sounds pretty shaky to me. That's why not.

+1
Maybe I'm wrong, but this struck me that way too.
You also are going to be pretty heavy invested in real estate.