Need brilliant revelation

[Guest greygreen]

I was hoping to use a roth conversion of my ira to help extract my husband and myself from an annoying liquidity situation, but based on what I've read, it doesn't appear that this is going to work. Let me lay out the scenario and see if anyone can come up with a way to make a roth work for us, and or offer any other useful advice:

My husband and I are both 32 yrs old. He is an executive with a base salary of $150k, and I no longer work but have been toying with the idea of returning to work (financial professional.) We have 2 young kids. All of our savings is in retirement accounts and our home (I'll get to that in a minute.)We have no debt whatsoever other than a $200k mortgage at 7 1/4%/15 yr/12 1/2 yrs remaining. My IRA rollover has about $100k in it depending on the day; my husband's 401k has around $200k in it.

Recently, my husband has been considering a career move, and has already been offered 2 positions. The last deal crashed over the unwillingness of the employer to do a home buyout so we could go ahead and move, and carry two mortgages for a finite period of time. The position was nearly 2000 miles from where we currently reside in Dallas, and after having split the family for 6 months to come down here, we were not willing to go through that again. After the deal crashed, I had some regrets about not blowing up my IRA (penalties and all) so we could go. We're young and capable of earning plenty of $ over our lifetime via salary pension and stock options, so that account to me is just play $ that I can look at and not touch for another 29 yrs. We do not have enough $ outside our home to make the downpayment on a second house, and renting is not an option with 2 kids and 5 big dogs. We need to go straight into a house. Credit and the ability to make 2 mortgage payments are not an issue. The sticking point is making the 20%downpayment necessary for carrying 2 mortgages. It's equally impossible to try to show our existing home with us and the dogs in it. Where all fixed up and clean it might sell in a week, it probably won't sell in 6 months or stay fresh with us here. So we're back to how to tap my IRA funds with the least penalty so that we can take a new position should the perfect one arise.

I don't see any means of getting our AGI under the $100k threshold for a roth, but if somebody out there does, please enlighten me. We will probably take a loss on the house, but I know of no way to use this loss until we have a passive income capital gain. It might be possible that if we made this move in 2001 carrying 2 mortgages, the interest payments on both homes could get us under the $100k threshold if I put off going back to work until 2002, but what is the maximum allowable interest deduction?

I could use a brilliant revelation about now.

GG

[John G]

Deductions can not help you qualify for a Roth conversion because modified AGI is used for the determination. You are basically dealing with page one or the Federal 1040, so just a small number of items (such as up to $3000 in capital losses, and schedule C business losses) can pull down your income.

You may want to look into a signature line of credit based upon the high salary. This would give you some flexibility. Second, you may also want to speak to the "premier" or "private" banking department in a major bank which could discuss with you various bridge loan options. Third, the job market is very tight right now and some companies may offer a signing bonus, mortgage guarentee, advance or other support to help you solve the problem. It doesn't hurt to ask. Fourth, if the home equity in your current home is significant you could borrow on the current house. Fifth, survey your relatives for possible "internal" financing... those CDs just don't provide much of a return for seniors. Sixth, talk to real estate agents about various options to delay settlement on the new house including "option to buy" or "rent to buy". Seventh, buy the new house with owner financing so you do not have institutional hurtles of loan ratios.

Many of the above techniques would not work for someone with an average salary. But, assuming you are not looking at houses above 1/2 million, the six figure salary you described gives you some flexibility. Some of the above may not work with your numbers and clearly in this marketplace you may find limited opportunities for items like 6 and 7. I gave you a lot of options to stimulate your creativity.

Taping the IRA is not a good idea. But here is a thought, you could pull the IRA funds and use the 60 day grace period. The IRA funds would then be used to make the down payment on the new house. Before the 60 days elapse, you use some line of credit option to borrow enough to complete the IRA rollover. That loan then gets repaid when you sell your current house. Complicated, yes. Timing issues too, but it might help you bridge the gap.

Note, you may be forced to cash out part of your husbands 401K. You need to evaluate the composition of that 401k and the current companies policies on terminated employees. I am not a specialist on 401k rules, you can find more info on the specific 401k benefit board section.

[Guest Dick Boever]

You mentioned your husbands 401k account. Does he have the ability to make a loan against it? I normally am not a proponent of loans against retirement plans, but this should be a fairly short term, bridge type loan.

If the $50,000 maximum loan amount is not enough, consider your IRA rollover account as a potential source. You can't borrow from the IRA, but you said it was an IRA rollover account, thus eligible to be rolled into a qualified plan. In Louisiana, it is very easy and inexpensive to set up a corporation ie a one women consulting firm, check for rules in Texas. That firm sets up a profit sharing plan allowing loans (Use one of the free prototype plans). You roll the IRA into the qualified plan, take a 50% up to $50,000 loan. I know for the unfamiliar this sounds like a difficult and perhaps expensive task, it's not.