If I were to survey my friends and their friends, I'm pretty sure I would find that almost all of us who could afford it helped our grown kids buy their first home. As a generational trend, it's kind of what we did and do. For some of us, the help is a loan and we expect to be repaid. For others, whatever chunk of the downpayment we give them is a gift, no strings attached beyond an expectation of a few invites to dinner.
But what happens when we retire and feel less flush--especially today as the financial markets are eating away at our savings. Our kids may already own a house but may need substantial help to update or add on to it--for a growing family or even for a suite for us.
Should we tap our IRA to help them out? Or just say no? For one set of parents whose daughter needed a loan to renovate her house, the answer was yes, and with good reason. Once the renovation was complete, they planned to sell their house and move into their daughter's home. They couldn't sell their house to raise money since their daughter and her family were living with them while the renovation is underway.
So, how to finance the help for a daughter who's very much part of their future living arrangement? The parents wrote to a Washington Post real estate columnist to ask whether they should tap their IRA for the $300,000 to lend their daughter or if there is a better way to borrow to finance the renovation, which is slated to take about a year. The parents plan to use the proceeds from the eventual sale of their home to boost their retirement account or pay off any loan they may incur.
Using IRA funds may be the simplest way to tap into money--interest-free cash! no closing costs! no bank fees! But it would be the worst of all possible options. Withdrawing such a large amount from an IRA would trigger a huge tax bill.
The columnist suggested other options. Here are the nuts and bolts of two options: A cash-out refinance of the parent's house would raise money but it would incur interest rates (ever-rising) and upfront fees. A home equity line of credit wouldn't raise quite as much money as a refinance could but would probably mean higher interest rates on the loan--though lower fees/closing costs. The interest rates might not be that much of a factor--if the renovation is finished on time and the parents can sell their house quickly to repay the loan.
Which is a long way of saying, our helping hand is a riskier business than ever.
(BTW: If you want to know more details on how the relative costs of the refinance versus home equity line of credit might work out, check this link to the Post story.)
art: Rauschenberg, Third Time