Tax Deferred Accout Distribution

[NotaWadaMoney]

I follow the 4% Rule for taking money out of our IRA account. But here is my issue. We're both retired and want to purchase an RV. Let's say that we have an account with $113,000 in it. If I take a lump sum distribution and I pay 25% tax, I'll have $100,000 to spend on our RV. This violates my 4% Rule. So, I could finance the RV and pull from my IRA the monthly payments which will spread the distribution out over x years. Now I'm paying not only the tax but also an interest expense. But pulling smaller amounts to make payments leave the bulk invested which earns interest which offsets the interest on the loan. Let's say the loan interest is equal to my investment interest, so as to cancel each other out. In which case, the tax burden is the same whether I take the lump sum or spread it out. I know that pulling smaller amounts over x years vs the lump sum might result is a small tax rate, but I don't think in this case that it will, so no advantage there. If I'm correct so far, does anyone see an advantage to one of these options over the other?

[disneysteve]

As a general rule, you shouldn't finance luxuries. I'm also not a huge fan of taking on new debt in retirement. But ultimately it's a numbers game. Which way results in your spending the least to acquire the RV?

Also, be sure that you don't need the income or principal from that 113K to support you going forward. Using the 4% rule, you're giving up about $4,500/year of income. And make sure that you understand the expenses that come along with owning an RV such as registration, insurance, storage fees, maintenance, fuel costs, etc. The 100K purchase is not the end of the story.

[NotaWadaMoney]

Steve, I've considered all of that. Sounds like you questioning my judgement and decision. I'm not asking if I should make the purchase. I'm just looking for opinions on which of the two options I posed would be the best.

[disneysteve]

Mentioning things you might not have thought of wasn't meant to question your judgement. It was intended to be helpful. Sorry if you didn't take it that way.

To answer your question, run the numbers. Do you know what interest rate you would get if you financed? How is the money currently invested and what return is it generating? The options might work out about the same. They might not. We don't have enough info to say for sure.

I honestly don't know but is it any more difficult to get financing when you're retired and don't have a weekly paycheck? I suppose it probably depends on your income sources and how predictable they are.

[corn18]

The answer to your question is to pay cash. If you can't afford to pull that much money out and live off the rest, then you can't afford it.

[Like2Plan]

I follow the 4% Rule for taking money out of our IRA account. But here is my issue. We're both retired and want to purchase an RV. Let's say that we have an account with $113,000 in it. If I take a lump sum distribution and I pay 25% tax, I'll have $100,000 to spend on our RV. This violates my 4% Rule. So, I could finance the RV and pull from my IRA the monthly payments which will spread the distribution out over x years. Now I'm paying not only the tax but also an interest expense. But pulling smaller amounts to make payments leave the bulk invested which earns interest which offsets the interest on the loan. Let's say the loan interest is equal to my investment interest, so as to cancel each other out. In which case, the tax burden is the same whether I take the lump sum or spread it out. I know that pulling smaller amounts over x years vs the lump sum might result is a small tax rate, but I don't think in this case that it will, so no advantage there. If I'm correct so far, does anyone see an advantage to one of these options over the other?

I'm not so sure you would have 100K to spend on your RV. 25% of 113,000 is $28,250 tax. 113,000-28,250= $84,750
I thought the new brackets were 22 and 24 or does that include your state tax?

It would be difficult to decide which was better because when you take larger lump sums out of your retirement account you could end up paying more taxes than just your current bracket. If you currently collect SS, maybe more of your SS would be taxed?

If you are currently on part B medicare, the higher income level could increase your part B payments: Income Related Monthly Adjustment Amount (IRMAA). (IRMAA has a 2 year lookback.) https://www.medicare.gov/index.php/y...s/part-b-costs

If this action puts your income over 250k (MFJ) or 200k (S), Net Investment Income Tax could cause an additional tax on interest, dividends and capital gains. https://www.irs.gov/newsroom/questio...ent-income-tax

One possibility to reduce the impact is to model conversions to Roth over multiple years. Do the conversions, rinse and repeat until you have the target amount. Take the proceeds from the Roth and buy the RV.

[disneysteve]

It's also hard to answer this without seeing the big picture. What other assets do you have, both in retirement accounts and in non-retirement accounts? Is the IRA the best place to draw the money from? Do you have other assets you can draw from that wouldn't create the same tax issues?

[NotaWadaMoney]

I'm not so sure you would have 100K to spend on your RV. 25% of 113,000 is $28,250 tax. 113,000-28,250= $84,750
I thought the new brackets were 22 and 24 or does that include your state tax?

It would be difficult to decide which was better because when you take larger lump sums out of your retirement account you could end up paying more taxes than just your current bracket. If you currently collect SS, maybe more of your SS would be taxed?

If you are currently on part B medicare, the higher income level could increase your part B payments: Income Related Monthly Adjustment Amount (IRMAA). (IRMAA has a 2 year lookback.) https://www.medicare.gov/index.php/y...s/part-b-costs

If this action puts your income over 250k (MFJ) or 200k (S), Net Investment Income Tax could cause an additional tax on interest, dividends and capital gains. https://www.irs.gov/newsroom/questio...ent-income-tax

One possibility to reduce the impact is to model conversions to Roth over multiple years. Do the conversions, rinse and repeat until you have the target amount. Take the proceeds from the Roth and buy the RV.

The $113,000 was a typeo, I meant $133,000. I don't collect SS at this time. This amount won't increase my tax bracket and you are correct on the 22 and 24 brackets. I was using a hypothetical number. I'm trying to say "IF' the tax is the same with a lump sum vs a distribution and if the interest expense is a wash with the income. It simply comes down to lump sum vs a distribution over 5 years. I have plenty of other money so this purchase isn't a concern. And finally, you reach a point where you realize that it's not money but time that's important. Time is a non-renewable resource. So no there isn't time to wait multiple years and worry about Roth or any of that.

Thank you for your comments. I've made my decision.

[corn18]

Thank you for your comments. I've made my decision.

What is your decision?

[NotaWadaMoney]

What is your decision?

To purchase the RV and now that my wife and I are retired full time, travel. I'll split the purchase between non-deferred + deferred fund for a down payment (about 1/2) and finance the rest. This way I can only be half wrong.

[jonelvinnaorbe]

Thank you for posting this