A pattern is playing out across the country: retirees are ready to downsize, they’ve found the right place, and the timing doesn’t align perfectly. The new home is available now. The current home hasn’t sold yet. To close on the new property, they need to come up with the purchase price — and the instinct is to pull from investment accounts to make it work. 

It seems logical. The money is sitting there. The home sale will replenish it shortly. But before liquidating any accounts, it’s worth running the numbers — because in most cases, a short-term financing strategy is the lower-cost option by a wide margin. 

A Real-World Example

Consider a client selling a home expected to net $450,000 and purchasing a condo for $250,000. She has a mix of taxable brokerage, Roth IRA, and traditional IRA accounts that could technically cover the purchase. The question is whether they should. 

If she liquidates from retirement accounts to pay cash: 

  • Distributions from a traditional IRA are taxed as ordinary income. At a 22% marginal rate, a $100,000 withdrawal generates $22,000 or more in federal tax alone. 
  • Roth IRA withdrawals are tax-free in the short term, but permanently remove dollars that compound tax-free for life. $74,000 left invested at 6% for 15 years grows to over $177,000 — all sheltered from tax. 
  • Large distributions can spike Modified Adjusted Gross Income, potentially triggering Medicare IRMAA surcharges and increased taxation of Social Security benefits. 

The smarter move is to use the equity in the home she already owns. 

Option 1: Home Equity Line of Credit (HELOC)

For clients with a paid-off home, a HELOC is typically the lowest-cost solution available. Most lenders will extend a line of credit up to 80–85% of the home’s appraised value. On a $450,000 home with no mortgage, that means access to $360,000–$382,000 — well above the $250,000 needed. 

  • Rate: Prime-based, currently in the 7.5–8.0% range (Q1 2026)  
  • Fees: Minimal — typically $0–500 in closing costs 
  • Flexibility: Interest accrues only on what is drawn, and only for the days it is outstanding. If the home sells in 60 days, she pays 60 days of interest. 
  • Payoff: The line is retired in full at the home’s closing with no ongoing obligation. 

 

One important timing consideration: lenders can be hesitant to issue a HELOC on a home that is already listed for sale. Where possible, the line should be opened before the home hits the market. 

Option 2: Bridge Loan

If the existing home still carries a mortgage, or if the remaining equity after the first lien falls short of the 80% LTV threshold, a bridge loan is the next best alternative. Bridge loans are short-term products designed specifically for this situation. They carry higher origination fees and rates than a HELOC, but still represent a far better outcome than triggering a large taxable distribution from retirement accounts. 

 

How the Costs Compare

Strategy  Estimated cost on $250,000  Retirement accounts 
HELOC on paid-off home  ~$500 in fees + ~$4,500 in interest (90 days)  All accounts fully intact 
Bridge loan  $2,500 origination + $5,000–$10,000 interest (3–6 mo)  All accounts fully intact 
Liquidate retirement accounts  $15,000–$20,000+ in income taxes  Permanent — cannot be replaced 

 

The Right Way to Think About It

For clients who have spent decades working toward being debt-free, any borrowing can feel like a step backward. It helps to reframe the question: this isn’t about taking on debt — it’s about choosing how to pay for something over a 60- to 120-day window. Staying debt-free can be the more expensive choice. 

The repayment source — $450,000 in home sale proceeds — is already identified. The client is not borrowing against an uncertain future income stream. She is using a short-term financing tool with a known payoff event and a defined cost. A few thousand dollars in interest preserves tens of thousands in tax-advantaged savings that can never be replaced once withdrawn. 

Before You Make a Move, Have a Conversation

Downsizing feels like a straightforward transaction — sell the big house, buy the smaller one, simplify your life. But as this example shows, the financial details underneath that decision can have consequences that ripple well beyond the real estate closing. Tax brackets, Medicare premiums, Social Security taxation, retirement account sequencing — these are interconnected in ways that aren’t always obvious until it’s too late to undo them. Before making any significant financial move, talk with your financial advisor first. A conversation that takes an hour can prevent a mistake that costs years of careful planning. The best decisions aren’t just about what you can do — they’re about understanding everything that comes with it.