Cashing Out IRA To Buy Car?

[momof1princess]

My DH has a small IRA that we set up 3-4 years ago when his company was bought out-we rolled it over from the 401K he had with the former company. We contribute to it sporadically, and honestly, I don't recall whether or not it's a regular or Roth IRA. Well, I'm in desperate need of a car, and DH came up with the idea of cashing out the IRA to pay cash for a new or relatively new used car. I'm not sure what I think about that, because I don't know what the tax ramifications of it would be, and we may need that money in our later years (he has a 401K with his current employer). Any opinions?

 

[HeatherC]

I would not recommend doing it. You will have to pay a 10 percent penalty tax on whatever you take out for early withdrawal. If it is a regular IRa you will also have to pay taxes on the whole amount in addition to the ten percent. If it is a ROTH you will pay the taxes on the earnings plus the ten percent penalty. Many years from now you will bel glad you have it. A car will be long gone.

 

[WDWisTheBest]

I would not recommend doing it. You will have to pay a 10 percent penalty tax on whatever you take out for early withdrawal. If it is a regular IRa you will also have to pay taxes on the whole amount in addition to the ten percent. If it is a ROTH you will pay the taxes on the earnings plus the ten percent penalty. Many years from now you will bel glad you have it. A car will be long gone.

I agree. Your advice is sound.

 

[momof1princess]

that's what i was afraid of, taxes and penalties. i'm pretty sure it's a regular IRA.

 

[hsmamato2]

bad bad idea- don't cash out a possible safety net for your future,for an item that won't last 10 years (on average)
save your money for a car,or get a decent rate loan if you have to.....

 

[QVCshopper]

Unless you are 59.5, you will owe lots of taxes. (If it was a Roth and you held the money there for five years, you could take your initial contribution without penalties.) I'd set up another Roth IRA at an established mutual fund company and put new money in there. In this day and age, we really you need to diversify and think ahead about taxes, etc.

 

[msmayor]

Others have already gone over the main reasons not to do this. Let's look at some simplified math to further the idea that this is a bad idea.

Let's assume that the IRA is worth $20,000, and cashing it in pushes you into the 20% tax bracket.

Right off the top, you will lose $6,000 in taxes ($4,000 in income tax - 20% - and $2,000 in penalty for early withdrawal - 10%).

That leaves $14,000 for the car, but in effect you will have paid $20,000 for a $14,000 car. Also realize that the $14,000 is the BOTTOM line for the car, so after you subtract sales taxes and fees you are looking at a car with a sales price of $12,000.

So...in effect, you will have spent $20,000 for a $12,000 car.

If you instead opted to finance a vehicle for 3 years...even a used vehicle with an interest rate of about 5%...that $12,000 car will only cost you about $15,000 after fees and sales taxes and the interest payments on the loan. The BEST part is that you will still have the IRA in the bank. Note that if you have some money to put down on the vehicle the total cost will be even less.

 

[momof1princess]

Others have already gone over the main reasons not to do this. Let's look at some simplified math to further the idea that this is a bad idea.

Let's assume that the IRA is worth $20,000, and cashing it in pushes you into the 20% tax bracket.

Right off the top, you will lose $6,000 in taxes ($4,000 in income tax - 20% - and $2,000 in penalty for early withdrawal - 10%).

That leaves $14,000 for the car, but in effect you will have paid $20,000 for a $14,000 car. Also realize that the $14,000 is the BOTTOM line for the car, so after you subtract sales taxes and fees you are looking at a car with a sales price of $12,000.

So...in effect, you will have spent $20,000 for a $12,000 car.

If you instead opted to finance a vehicle for 3 years...even a used vehicle with an interest rate of about 5%...that $12,000 car will only cost you about $15,000 after fees and sales taxes and the interest payments on the loan. The BEST part is that you will still have the IRA in the bank. Note that if you have some money to put down on the vehicle the total cost will be even less.

thank you! i'm showing this to DH to prove my point!

thank you, everyone! i didn't care much for the idea when DH proposed it, but bless him, he's just trying to help.

 

[lost*in*cyberspace]

I suggest that you and your husband make an appointment with a reputable financial planner. An initial consult should be free. If your husband thinks that it would be wise to cash out an IRA to buy a car, he really needs some financial advice. I am not criticizing him, just making a suggestion.

 

[momof1princess]

I suggest that you and your husband make an appointment with a reputable financial planner. An initial consult should be free. If your husband thinks that it would be wise to cash out an IRA to buy a car, he really needs some financial advice. I am not criticizing him, just making a suggestion.

lol, he was just throwing out ideas, but thank you. he's very financially responsible. i am grateful to everyone for reinforcing our reasons for not doing this, and i'm glad we didn't take this money when it was rolled over a few years ago-the taxes wouldn't have been worth it.

 

[BradMac]

I would not recommend doing it. You will have to pay a 10 percent penalty tax on whatever you take out for early withdrawal. If it is a regular IRa you will also have to pay taxes on the whole amount in addition to the ten percent. If it is a ROTH you will pay the taxes on the earnings plus the ten percent penalty. Many years from now you will bel glad you have it. A car will be long gone.

Very true..

 

[eeyoresmom]

If it a Roth IRA you can withdraw your contributions anytime without penalty. (You can not withdraw any earnings penalty free.) I'm not recommending this, however.

 

[msmayor]

If it a Roth IRA you can withdraw your contributions anytime without penalty. (You can not withdraw any earnings penalty free.) I'm not recommending this, however.

I'm going to go out on a limb here though and assume that the OP's IRA is NOT a Roth.

If the IRA was rolled over from a 401(k), its a traditional rollover IRA subject to withdrawal penalties on the full balance of the account.

 

[Tramp68]

You can often take a loan against your IRA up to 50% of the value. You pay yourself back over 5 years and it is usually under 6% interest. You are also paying the interest back to yourself so it is better than a car loan...

 

[Sadie22]

If it a Roth IRA you can withdraw your contributions anytime without penalty. (You can not withdraw any earnings penalty free.) I'm not recommending this, however.

I don't think this is true in the OP's case. The original funds came from a 401(k) rollover, so there would be penalties if an early distribution were taken.

 

[msmayor]

You can often take a loan against your IRA up to 50% of the value. You pay yourself back over 5 years and it is usually under 6% interest. You are also paying the interest back to yourself so it is better than a car loan...

You cannot take a loan from an IRA. Its a prohibited transaction. At best, you can withdraw funds for up to 60 days to avoid the penalty, but on the 61st day you are subject to the taxes and penalties.

Some 401(k) plans permit loans, but not all do. It depends on the employer's set-up.

 

[a1tinkfans]

The Taxes youd pay, the early penalty youd pay...not a good idea,,,,take a loan instead, great rates on new cars for sure (some even at 0% and even older cars are reasonable, try bankrate dot com....as a start...
good luck...

 

[meriface11]

You can often take a loan against your IRA up to 50% of the value. You pay yourself back over 5 years and it is usually under 6% interest. You are also paying the interest back to yourself so it is better than a car loan...

I disagree that a 401k loan is better than a car loan. while you are paying interest back to yourself, 1) you repay the loan with post tax dollars, and you will be taxed on the same money again in retirement when you take it out 2) there is potential opportunity loss...the money you should have invested could be growing at a rate higher than the interest you are paying back to yourself.

 

[Lisa loves Pooh]

In this case it would be FAR FAR FAR cheaper to finance the car.

It is expensive to use your IRA/401K money before you are at the age where you can withdraw.

The interest rates on a car loan are a fraction of that.

Never ever do a 401K loan. It is IMMEDIATELY due if there is a job loss (do not kid yourself that something could not happen). IF remains unpaid, then it is considered an early withdrawal with all the taxes and penalties associated with it.

 

[Tramp68]

In this case it would be FAR FAR FAR cheaper to finance the car.

It is expensive to use your IRA/401K money before you are at the age where you can withdraw.

The interest rates on a car loan are a fraction of that.

Never ever do a 401K loan. It is IMMEDIATELY due if there is a job loss (do not kid yourself that something could not happen). IF remains unpaid, then it is considered an early withdrawal with all the taxes and penalties associated with it.

Tell that to someone with bad credit who is told they have to pay 20+ % to buy a car that they desprately need