We have $8 million in traditional IRAs. Should we tap them to buy a house — and take the tax hit?
Short answer: Usually no. Pulling a large lump sum from a traditional IRA to buy a house is one of the most expensive ways to fund a purchase because every dollar is taxed as ordinary income, potentially with a 10% penalty if you’re under 59½, plus state tax. There are situations where using IRA money in a measured way can make sense, but writing a check from a pre-tax IRA for an all-cash house is rarely the optimal first move.
Here’s how to think it through, with trade-offs, math, and smarter alternatives.
What a big IRA withdrawal really costs
– Ordinary income tax: Traditional IRA distributions are taxed at your marginal income tax rate in the year you take them. A large withdrawal can push you into the top federal bracket (currently 37%) and add state income tax (0–13%+ depending on where you live).
– Early withdrawal penalty: If you’re under 59½, add 10% penalty unless an exception applies. A first-time homebuyer exception allows up to $10,000 per person penalty-free, but regular income tax still applies.
– Collateral tax effects:
– Medicare IRMAA surcharges (for those on Medicare) two years later if your modified AGI spikes.
– Loss of deductions/credits and phaseouts that key off AGI.
– Net Investment Income Tax (3.8%) doesn’t apply to IRA distributions themselves, but a big withdrawal can push your income high enough that your other investment income gets hit by it.
– You can’t undo it: Beyond the strict, once-per-12-month 60-day rollover rule (see below), once money leaves a traditional IRA it cannot be put back beyond small annual contribution limits.
The opportunity cost
An $8 million IRA is a compounding machine. A large, one-time distribution not only triggers a tax spike today; it also reduces future tax-deferred growth. If you can borrow at a reasonable rate, keep your portfolio intact, and pay down debt over time, the long-run math often favors financing instead of a lumpy, fully taxable draw.
How big is the tax wedge? A quick illustration
Say you want $2,000,000 cash for a house.
– Federal top bracket 37% + state 9% = 46% effective marginal rate.
– To net $2,000,000 after tax, you’d need to withdraw about $3,703,700 ($2,000,000 ÷ (1 – 0.46)).
– If under 59½, a 10% penalty would push the needed withdrawal even higher.
– You might gain a slight price advantage as a “cash buyer,” but even a 3% discount ($60,000 on $2 million) pales versus seven figures of taxes.
When might tapping the IRA still be reasonable?
– You’re over 59½, already in a high bracket due to large RMDs, and the withdrawal won’t materially change your marginal rate or surcharges.
– You plan to spread withdrawals over several tax years to keep your marginal rate in check.
– You’re about to relocate from a high-tax state to a low- or no-tax state and can time the distribution after you establish residency.
– Your risk tolerance or life circumstances strongly favor owning debt-free and you’re comfortable with the tax trade-off.
Better funding options to consider first
1) Use a mortgage strategically
– Rates vs. returns: If your long-term, after-tax expected portfolio return exceeds the after-tax mortgage rate, keeping investments compounding while you borrow often wins.
– Flexibility: You retain liquidity for emergencies and opportunistic investing.
– Taxes: Mortgage interest may be deductible if you itemize, up to legal limits. The benefit is smaller than it used to be, but it still matters for some households.
2) Draw from taxable accounts before IRAs
– Capital gains vs. ordinary income: Long-term capital gains are typically taxed at 0%, 15%, or 20% federally, often lower than your IRA ordinary income rate. You may also have tax lots with losses to harvest.
– Step-up on death: Taxable assets get step-up in basis for heirs; IRAs don’t. All else equal, it can be more efficient to spend taxable dollars first and let pre-tax IRAs convert over time via planned Roth conversions.
3) Securities-based line of credit (SBLOC) or margin loan
– Collateralized by a taxable portfolio, not retirement accounts.
– Fast, competitive rates for large, high-quality portfolios.
– Interest may be deductible against investment income (ask your tax pro).
– Keep loan-to-value conservative to reduce risk of margin calls.
4) HELOC or bridge loan
– If you own a home with equity, a HELOC can fund a down payment or bridge timing between sale and purchase without disturbing your retirement accounts.
5) The 60-day IRA “bridge” (use with extreme caution)
– You can take one 60-day rollover per 12 months per IRA owner, using IRA funds briefly and redepositing them within 60 days.
– This is risky for large sums: one-day delay = full tax + possible penalty; the rule applies in aggregate across your IRAs, and banks can’t extend the deadline. Consider this only if alternative liquidity is certain and timing is airtight.
If you do use IRA money, make it as tax-smart as possible
– Mind your age:
– Under 59½: Limit to $10,000 per spouse if you qualify as first-time homebuyers to avoid the 10% penalty on that slice; taxes still apply.
– Over 59½: No penalty, but still ordinary income.
– Spread withdrawals across calendar years: For example, take part in December and part in January to straddle two tax years and soften bracket creep.
– Coordinate with state residency moves: Large withdrawal after establishing residency in a no-tax state can save six figures.
– Watch Medicare IRMAA: If you’re 63 or older, a big 2024 distribution could raise your Medicare premiums in 2026. Sometimes it’s worth it; just price it in.
– Use withholding to manage estimated tax: Withholding from IRA distributions is treated as if paid evenly throughout the year, which can help avoid underpayment penalties even if done late in the year.
– Keep the portfolio aligned: If your IRA holds bonds and your taxable account holds stocks, selling stocks in taxable could incur capital gains while taking cash from bonds inside the IRA via required distributions might be more tax-efficient over time. Evaluate asset location and rebalancing impacts.
Roth conversions vs. big house withdrawals
– Converting IRA dollars to Roth voluntarily in lower-income years can reduce lifetime taxes and make future withdrawals tax-free. A giant house-related withdrawal that pushes you into the top bracket sacrifices that opportunity.
– One compromise: finance the house with a mortgage now, then in lower-income years pre- or early retirement, execute annual Roth conversions “up to” a target bracket (e.g., fill the 24% or 32% bracket). That keeps lifetime taxes lower while you live in the home you want.
Special situations
– Near or in RMD territory (age 73+ for many): An $8 million IRA comes with substantial RMDs. If your RMDs alone already put you in a high bracket indefinitely, selectively using IRA withdrawals for housing might not change your rate much. Still compare financing costs vs. the tax wedge.
– Charitably inclined and age 70½+: Qualified Charitable Distributions (QCDs) can reduce RMDs and AGI. Lower AGI can create room to take additional IRA distributions or Roth conversions at better brackets, indirectly supporting goals like paying down a mortgage faster.
– Cash-buyer discount: If a seller discount is truly material and only available for a fast, all-cash close, consider a short-term SBLOC or bridge loan rather than an IRA raid. You capture the price break and keep the tax hit minimal.
A practical decision framework
1) Size the need and timing: How much cash and by when?
2) Map your tax picture:
– Current and projected tax brackets, state taxes, IRMAA exposure, NIIT on other income.
– RMD timetable if applicable.
3) Inventory funding sources and costs:
– Mortgage, HELOC, SBLOC/margin, taxable assets, limited IRA use.
4) Run after-tax comparisons:
– What does each dollar from each source cost after tax and fees, today and over 10–20 years?
5) Stage intelligently:
– If IRA use is unavoidable, spread over years and coordinate with life events (retirement, relocation).
6) Protect liquidity:
– Maintain an ample cash buffer; housing surprises are common.
7) Document and withhold:
– Set appropriate withholding to avoid penalties; track IRMAA implications.
Bottom line
With $8 million in traditional IRAs, the tax system almost always rewards patience and planning. Buying a home by emptying a pre-tax account or taking a large one-time distribution generally imposes the highest possible tax cost at the least favorable time. In most cases, you’ll be better off using a mortgage or other low-friction financing, selling taxable assets first, and reserving IRA withdrawals for a staged, bracket-managed plan that may also include Roth conversions.
Before you move money, have a fiduciary planner and tax professional model:
– Your multi-year tax brackets under different funding mixes
– State-tax timing if you might relocate
– IRMAA and cash-flow effects
– Investment return assumptions vs. borrowing costs
A couple of hours of modeling can save hundreds of thousands—sometimes millions—over your retirement.
