For retirees, the rules of money are fairly straightforward: No debt. Keep your money invested.
But what if you really must replace your car? Should you take money out of your traditional IRA? Here are some considerations:
Taxes on extra withdrawals:
If you pull $50,000 out of your traditional IRA for a vehicle, this adds directly to your taxable income. It might push you into a higher tax bracket. You'll pay more taxes.
You might also pay more for Medicare. In fact, your Medicare premiums could be higher for the next two years and that means your social security check will be smaller. One example: At the lowest tier of Medicare charges, a single person with $109,000 income, pays $202.90 for Medicare. If you add $50,000 to your income from an IRA withdrawal, you will pay about $81 more for basic Medicare every month for at least two years. Your Part D prescription payment will rise to just over $14.
Lost opportunity:
Say you withdraw $30,000 extra from your IRA, even at a modest 5 percent interest, you will lose out on about $19,000 over the next 10 years. If you add increased Medicare charges for two years, the $50,000 car cost you $50,000 plus $19,000 in nest egg growth, $2,000 in higher Medicare premiums, higher taxes for one year, plus tax, title, and license costs.
On the other hand, if you urgently need a car, you have ample assets and income, and you prioritize being debt free, an IRA withdrawal might be okay. Check with a financial advisor or tax pro before you decide!
