Welcome back to “Ask an Advisor,” the advice column where real financial professionals answer questions from real people. The topic can be anything in the world of finance, from retirement to taxes to wealth management — or even advice on advising.
Downsizing one’s home is a common way to save money during retirement. Sixty-four percent of American seniors move at least once after they retire, according to a study by Merrill Lynch. Of those who do, about half move to a smaller house.
But buying a home — even a smaller one — is not easy in today’s economy. Housing prices have risen by 47% in the past 10 years, according to Federal Reserve data. Meanwhile, as interest rates have increased, mortgages have jumped to their highest levels in two decades.
But what if you had the chance not to buy a home, but to build one? An older woman in California believes she has enough savings to construct a small residence on her son’s property. In her view, this would not only reduce her housing costs, but could also help her and her son care for her husband, whose health is deteriorating.
READ MORE: Ask an advisor: Is buying a home really necessary?
Guiding her through her options is her financial advisor: Ralph Roy Ramirez, founder of Ramirez Financial Services in Yucaipa, California. But Ramirez sees an obstacle to her dream: the U.S. tax code. For help, he turned to his fellow wealth managers for advice. Here’s what he wrote:
Dear advisors,
I’m a financial advisor in Yucaipa, California, and I could use some help guiding one of my clients through a complicated transition.
My client is an 81-year-old California woman who wants to downsize her home. She is in good health and very active, but her husband has dementia and requires full-time home health care. To save money and accommodate her husband, her plan is to move into an additional dwelling unit (ADU), which would be built to the rear of her son’s property.
To pay for this, she has about $300,000 saved up in two IRAs and two 457 deferred compensation plans. But here’s the rub: This money could cover the construction, but not the taxes she would have to pay for making the withdrawals.
Is there any way around this? I know there are favorable tax treatments available for emergency expenses. What about for the construction of an ADU and home health care? Can you guide me?
Thank you,
Ralph Roy Ramirez
And here’s what financial advisors wrote back: