Q: I am a 68 year old retiree and my income is only $860 per month. I am planning to buy a condo for $68,000 and using $35,000 from my IRA as a down payment. Is this a wise move? The rental rates right now are about $695 per month.
A: Good question. The first thing you’d have to consider is that a withdrawal of $35,000 from your IRA may cause you to pay a significant amount of federal income taxes. If you’re in a low federal tax bracket and don’t pay much in federal income taxes, the withdrawal may bump you up as the $35,000 will be considered additional income. You may end up paying $5,000 or more in taxes as a result of the withdrawal and depending on your tax situation.
If you plan to obtain a loan for the balance of the payment for the condominium purchase, you may find that you won’t benefit much from the low loan balance left. You may wind up having to pay several thousand dollars to get that loan.
If you have to pay $3,000 for the loan and end up paying $5,000 in additional federal income taxes due to the withdrawal from the IRA, will those payments impact you negatively in any way? Do you have the cash available to manage those payments? Would the purchase still make sense for you?
While your new condo’s monthly expenses may be less than you’re paying for your rent, you need to know what the monthly condominium assessments will be and what your annual property taxes will be?
Let’s say you find out that the condominium assessments will be $250 per month and the real estate taxes on a monthly basis will end up being about $150. Your monthly mortgage payment may be about $125. Those payments will cost you about $525 per month, saving you about $170 per month over the cost of renting.
While there are some savings, you also have some additional costs associated with the purchase, including the move and any other costs relating to owning a condominium. When the dishwasher breaks, for example, repairing that appliance will come out of your pocket.
You also need to determine whether you will need the IRA money in the future for your expenses. That IRA money may continue to grow for you if have invested it in a place that earns you either dividends or interest or in stocks that don’t end up going down in value.
If you decide to go to the condominium building, you had better review the finances of the association before you sign on the dotted line. If the condominium associations finances are weak and they end up having to spend money on building improvements, those costs may come back to haunt you in the form of a special assessment.
If those costs are significant, the low purchase price of the condominium may not outweigh the additional expenses you end up paying to keep up the building. Remember, if you rent in a building you usually aren’t responsible for repairs or capital improvements. The landlord can raise your rent, but you can always move to another building.
You’ll have to review all of these costs and determine for yourself if the move is right for you. You may decide the new place is what you want and need and can go ahead and do it. Please tell us what you decide to do and how it turns out.