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I am in the process of buying a house, and as a result i need to sell a lot of stocks. The problem is 70% of my taxable accounts is Brk and 100% of my IRAs is Brk. I have roughly equal $amounts in both type accounts. The brks in either type of accounts have unrealized capital gains of between 130-180% percent.

Then this hits me: Won’t it be more efficient if I sell my stocks in the IRA instead of selling from the taxable accounts? If I sell from IRA, i need to pay 10% penalty + income taxes, but I won’t have to pay capital gains tax. That means, if the unrealized capital gain % is sufficiently large, I might get more after tax+penalty dollars for selling the same amount of stock if I sell my IRA?

What you guys think?

Not sure I’m following your math on this one. Of course it depends on your marginal tax rate on ordinary income but let’s assume 24% and that you need $200k cash. Tax on that incremental $200k is $48k plus 10% penalty if pre 59.5 so another $20k for $68k total tax.

Now assume you are using the taxable account and to receive $200k you’ll have a long term cap gain of $122k ($78k cost basis up 155% as a midpoint of your 130%-180%). Again depends on your overall income as these gains could be at 0,15,18.8 or 23.8% (all fed rates here) but assume 18.8% if you’re over $250k AGI and the cap gains tax is about $23k ($122k * .188).

I’d prefer paying $23k tax over $68k.

One more idea - depending upon timing if you are selling your current house but need a bridge, you could use Schwab Pledged Asset Line or Fidelity Securities Backed Line of Credit at 6-7% so as to avoid paying the cap gains tax. The math can make sense on this depending upon size and your timeline.

Hope that helps.

Thanks BG.

Sigh, i am getting a mortgage now, but despite i have liquid assets several times of the mortgage amount i want to apply, the bank will only look at my w2 salary to determine how much loan to approve. There are of course asset-backed mortgages i heard, but the interest rate is 2% higher.

I remembered many years ago Bernanke complained he couldn’t get a mortgage because he’s retired. The lending rules of the banks are indeed quite restrictive (or i would even say unreasonable)

Back when I was in business, I realized that my wife did not have a financial "track record", so I registered the business credit cards in her name. These cards cycled 5-6 figured per month (always paid off when duee). When I retired, her credit was "golden". Mine, without significant credit card usage had to be built from scratch (despite my assets or investment income).

Jeff

“ Mine, without significant credit card usage had to be built from scratch (despite my assets or investment income).”

Same thing happened to me. My wife and I only use one credit card, and she is the primary holder, and I am just an added user. I froze my credit and hadn’t applied for any credit card for the last 10-15 years.

When I went to BoA to apply for mortgage, they said i have no credit history (despite they lent me a car loan for a Mercedes just a few years ago which I paid off after a year, and that they know my wife has no job yet carry the only credit card of the family). BoA is so stupid. I am in fact in the process of moving my millions of assets out of BoA

despite i have liquid assets several times of the mortgage amount i want to apply, the bank will only look at my w2 salary to determine how much loan to approve.

They want to make sure you have adequate cash flow coming in to service the outgoing cash flow (the mortgage payments, etc.)
OTOH .... I once saw the underwriters note on my mortgage application. She wrote "note that he has more money in his 401K than the requested mortgage amount." My salary was good enough to get approved anyway.


Bernanke complained he couldn’t get a mortgage because he’s retired. The lending rules of the banks are indeed quite restrictive

If Bernanke really said this, he was lyin... uh, shading the truth.
I have gotten 5 mortgages since retiring. One purchase mortgage and 4 refinances.
What they want to see is incoming CASH FLOW. You just have to show them that you have set up a regular monthly distribution from your IRA/401K and enough money in the account for 36 months of that distribution amount. IOW, they want it to look like a paycheck.

It is all detailed out in the FNMA rules for lenders. Most mortgage people don't know about this, because 99% of borrowers have a paycheck and are not retired.

The underwriter who keyed me to this said "You can stop this after the mortgage closes." Just as you could lose your job after the mortgage closes.

When I went to BoA to apply for mortgage, they said i have no credit history (despite they lent me a car loan for a Mercedes just a few years ago which I paid off after a year, and that they know my wife has no job yet carry the only credit card of the family). BoA is so stupid. I am in fact in the process of moving my millions of assets out of BoA


Any other bank is going to do the same. They all look at the applicant's credit report.

Dave Ramsey touts that you don't need a good credit score. Or any credit cards. Every time he says that in a youtube video he gets roasted in the comments. In this day and age, it is necessary to have a good credit report or life can be quite difficult.

Anyway, it is not difficult to build up a good credit score. Put a $1000 or more (a bunch of money) in a savings account at a local bank. Then go in and ask for a 12 month personal $900 loan, pledging the account as collateral.
Make 3-4 monthly payments, then pay it all off. It only costs you a few bucks net.
Do this a couple more times, maybe at different banks.



My wife and I only use one credit card, and she is the primary holder, and I am just an added user

Not a good move.
Both husband & wife should have credit cards & bank accounts in their own name, listing the other as added user. Both should have their own good credit report & credit history. It does not cost you ANYTHING to have accounts in each name. There is no advantage in only one of you having primary account(s). And more than one credit card.

Think of all the things that can go wrong. Account gets hacked, card gets stolen, card gets blocked for possible fraud, death, etc.

BoA is so stupid. I am in fact in the process of moving my millions of assets out of BoA

Do that. High street banks are generally not the place to have your investments.

I like Fidelity and Vanguard. Fidelity will pay you a bonus to move to them.

<< If I sell from IRA, i need to pay 10% penalty + income taxes, but I won’t have to pay capital gains tax.>>

Not sure if this applies or if it makes numerical sense to your situation but the 10% penalty for early withdrawal can be avoided by doing a 72t withdrawal. Aka Substantially equal payment plan (SEPP). It’s possible to designate a subset of the IRA account that gets SEPPed. Only hitch is the withdrawals have to continue for the longer of five years or 59.5 age. FWIW

Thanks BrkNut!
Doesn’t apply to my situation.
I need a lumsum money..
Wife (and daughter) wants a big house - so i have to divorce some of my beloved and greatly appreciated brk shares.. lol

(My wife knows how much I love my Brk, so she is in fact quite touched by my sacrifice)

" What you guys think?"

Depending on how much cash you need toward the down payment and how many shares you own, you could sell calls, close to the money and use the proceeds toward the house. IF brkb stays flat to lower you keep your shares and you raised the cash toward the down from the proceeds of the calls sold. Best case, they all love you and you keep most of your stock! Good luck.

If Bernanke really said this, he was lyin... uh, shading the truth.

<snip>


It is all detailed out in the FNMA rules for lenders. Most mortgage people don't know about this, because 99% of borrowers have a paycheck and are not retired.


That's why he was having trouble. The mortgage people hadn't heard of it, so they just move onto the loan.

“Depending on how much cash you need toward the down payment and how many shares you own, you could sell calls, close to the money and use the proceeds toward the house”


For every $100k of brkb, selling ATM 3Month call will only net me about 3%, which is $3k. Not enough for down payment :)

Brkb’s option’s implied vol is cheaper than every stocks in my watch list, even cheaper than QQQE and GLD. Actually i think it makes more sense to sell the stock and buy OTM calls (for my situation if i have to sell) or just buy puts (for people worry about about valuations but don’t like the tax hit come with the sell)

You should realize that you are going to have to pay the capital gains tax _sometime_.

The only question is whether you pay it now or pay it later. So don't tear your hair out agonizing over it.

Do what needs to be done and move on with your life.

<<Capital gains tax rates
Net capital gains are taxed at different rates depending on overall taxable income, although some or all net capital gain may be taxed at 0%. For taxable years beginning in 2024, the tax rate on most net capital gain is no higher than 15% for most individuals.
A capital gains rate of 0% applies if your taxable income is less than or equal to:

$47,025 for single and married filing separately;
$94,050 for married filing jointly and qualifying surviving spouse; and
$63,000 for head of household.>>

https://www.irs.gov/taxtopics/tc409

just for your info.

<You should realize that you are going to have to pay the capital gains tax _sometime_.>

I don't pay capital gains tax as long as my withdrawal liquidations don't push my net taxable income over the limit. When I liquidate a lot in a single year I get hammered, as happened in 2020 with the Covid bust.

Tom

To be clear, your IRA is "traditional"? Meaning it is not a "Roth IRA"?

Lets assume the IRA is "traditional" and is NOT a Roth IRA. This means that you will pay income tax on every dollar you take out of that account, at the same rate you would have paid tax had this been wages from your employer.

By contrast, the regular account you have with BRK stock in it, you will pay MUCH LESS tax to raise the same amount of cash by comparison to your IRA.

In quick summary, suppose you take $200,000 from your IRA. You will pay
1) regular good old income tax just as if you had made $200,000 wages at work
2) PLUS 10% penalty for taking the money out before you are 59 and a 1/2.

By contrast, if you sell $200,000 of BRK stock from your regular investment account, let us assume that your cost basis is $50,000 and so you have $150,000 of capital gain. You will pay:
1) income tax at the MUCH LOWER long-term capital gains tax rate which can be 15%, 10%, or even 0% depending on how much other income you have that year, but will always be a lower rate than regular income tax rate
2) You will pay that capital gain tax only on the $150,000 of capital gains, you will get the $50,000 cost-basis part of your withdrawl with no taxes owed on that
3) There is no penalty.

So I don't know what you are thinking to suggest that you can pay less tax taking it from the IRA than from the regular account, but I assure you you have it backwards.

Good luck with the new house!
R:

What they want to see is incoming CASH FLOW. You just have to show them that you have set up a regular monthly distribution from your IRA/401K and enough money in the account for 36 months of that distribution amount. IOW, they want it to look like a paycheck.
It is all detailed out in the FNMA rules for lenders. Most mortgage people don't know about this, because 99% of borrowers have a paycheck and are not retired.
The underwriter who keyed me to this said "You can stop this after the mortgage closes." Just as you could lose your job after the mortgage closes.

I can corroborate RayVT's comment, and it's an important and useful point that retirees buying a house should be aware of:

In my situation, I had a very-clued in mortgage broker: I was willing to pay cash and stated that in the offer, but actually paying cash would have required cashing out some assets. He got me a very competitive loan in under 30 days from offer to close (part of the attractiveness to the seller was "all cash, quick close". ). Exactly as RayVT said, I had initiated monthly distributions from IRA when I knew I would be buying so the additional IRA distrib plus my retirement cash flow satisfied mortgage rules regarding a sufficient income. I stopped the distribution after closing. It's perfectly legal - as RayVT said, you might not have been retired but instead employed with a fat paycheck, approved for a loan, and then unfortunately lost your job after closing.
As far as using a mortgage broker: they are paid by tacking on a small percentage as a fee (you don't see this, you look at the net rate and APR). But if they get you a better deal than you would have found on your own, are extremely knowledgable and go above and beyond as in my case , then a net tiny fee for service, if it in facts net positive at all compared to what you could have done on your own, is well worth it.

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