I have a mortgage issue that I hope you can help me with. I am in my late 50s and I just got married again to a man a few years older than me. We have decided to buy a new home. We currently live in my house which is free and clear and worth about $300,000. We are looking at a condominium that will cost us about $400,000. We plan to use the equity in my house, but the question is what we should do for the extra $100,000. My new husband doesn’t have any savings. He has a pension and Social Security which covers his expenses, but that’s about it. My financial situation is that I have about $200,000 in an IRA and about another $150,000 outside the IRA in the bank. I’m also still receiving payments from my ex-husband to cover my expenses. I get those payments for about another six years, until I get Social Security. At that time, I will also get a share of my ex’s pension, so from a living standpoint, we are all set. My question to you is where should I get the $100,000 from; the bank or my IRA? Also, my new husband thinks the house should be in both our names. Another question is, if I pass away first, does the house go to him or does it go to my children? You should know the older I get, the more conservative of an investor I am.
In reviewing your situation I would recommend that you get the extra $100,000 from the bank as opposed to your IRA. My reasoning is that if you would take the $100,000 from your IRA, that money is taxed to you as ordinary income. What that would mean is that you would lose approximately one-third of that money just for taxes. Therefore, you really would have to pull out more like $150,000 to net $100,000. Since the money in the bank is readily available and there are no tax consequences, I think the smart move is to use the money in the bank.
I always tell people that you should never let the tax tail wag the dog; however, that doesn’t mean that we forget about taxes. In the situation at hand, it is clear that taxes are a major factor in this transaction. Therefore, we’re not doing something for tax reasons and tax reasons alone; rather, we’re making the decision based upon what is financially better for you.
As a side note, I do like the fact that you are paying cash for the home. In your situation, considering the new tax law, it appears to me that in the future you will be taking the standard deduction versus itemizing. Therefore, when you look at what the mortgage is going to cost you, which will be in the four percent area, versus the return you’re getting on your CD after taxes, which is probably in the area of a half percent, you can see that it makes good financial sense to pay cash for the home.
With regards to your second question, if you put your husband’s name on the deed as husband and wife, what that means is that if you should predecease your husband, he would then be the sole owner of the property. It also works the other way, that if your husband should predecease you, you would be the sole owner of the property. If you want the property to go to your children, it’s best to keep your husband’s name off the deed.
I see this situation a lot where there is a second marriage and one spouse has resources and the other one does not. In addition, I also see many situations where both parties are going into a second marriage with resources, but also have children from previous marriages that they want to protect. In these types of situations before the parties tie the knot, I generally recommend the couple consider a pre-nuptial agreement. A pre-nuptial agreement is a way of not only protecting the children but also can protect the parties in case the marriage does not work. Pre-nuptial agreements are no longer just for the wealthy, they potentially can be beneficial to just about anyone. In fact, in today’s world, considering that people are getting married later and later in life, it’s not unusual to use a pre-nuptial agreement even for first marriages.
I recognize that there is sometimes a stigma with pre-nuptial agreements and it could lead to some strain and discomfort in the relationship. That being said, I also would remind you that we are adults, and we have to sometimes discuss some uncomfortable issues and this is one of those times. After all, if financial issues are going to be a problem, isn’t it best to resolve them now before you take the next step as opposed to kicking the can down the road and hoping the problem goes away? I can assure you the problem rarely goes away; rather, it comes back to bite you at generally an inopportune time.
One last note – not all pre-nuptial agreements are adversarial and in the majority of situations the parties are able to find common ground and move forward with their relationship. Therefore, if you are about to get married, particularly if it’s not your first time, you need to honestly look at your finances and ask yourself what happens if your spouse predeceases you or if the marriage does not work. These are important issues and as adults we owe it to ourselves to handle these issues head on.
If you would like Rick to respond to your questions, please email Rick at firstname.lastname@example.org