Is this a good use of Roth IRA?

[bada bing]

There are two arbitrages to consider:
The difference between expected Roth returns and auto loan interest
The difference between todays tax bracket and predicted future bracket.

Just a seat of the pants guess, my first inclination is just make the scheduled payments, second choice I'd pull the money from the traditional. The outcome differences don't appear to be big in any case. JMO, but Roth is my account of last resort unless there's a compelling difference. In this case there isn't.

 

[Sunset]

They could pay the car payments until 2026 (1 month) and then withdraw from IRA like they did for the roof and pay it off.

 

[pb4uski]

The Roth is likely earning more than 6.5%, so just make the loan payments from cash flows or withdraw money from the IRA if cash flow is insufficient.

 

[ransil]

wait til next year and pull from IRA

 

[mrfeh]

Pay it off from the TIRA in January, so the withdrawal doesn't contribute to 2025 income.

 

[DustyMom]

I guess I should have mentioned that this would not take place until at least 2026 since they have not even made the first payment yet!

Most of you seem very confident that the stock market will continue to return at least 6.5% over the next few years. Am I the only pessimist out there?

In any case, thank you all for the advice. You have given me a lot to consider. It might come down to how well they sleep at night and wanting to get out from all debt.

 

[junkanoo]

OK, I have gotten some additional info, if this helps.

• Loan interest rate: 6.5%
• Loan amount: about $33k. (total interest just under $6k)
• They assure me there is no early payoff penalty
• Roth Balance: about $120k, invested in total stock market index
• T-IRA balance: about $1.1M, invested in total stock market index/Int'l index/Money Market
• When pension and SS kicks in, probably just under $100k per year
• No significant savings other than Roth and T-IRA
• $40k from part-time work, mostly to pay for medical/dental/vision (retiree plan, not ACA)
• They hit the 22% bracket this year, mostly due to T-IRA withdrawal to pay for new roof
• I don't see that IRMAA or 24% bracket will ever be a danger
• 2025 taxable income somewhere around $120k (and that is with the approx $20k w/d to pay for roof)

It is helpful. However, that 2025 "taxable" income of 120k ... does that include the T-IRA already paying for the approximate $16K in taxes owed ... or not?

Either way, I agree that as a couple they won't be an IRMAA victim or in the 24% bracket. But, the last-to-die may if that pension keeps rocking on.

I get that the new roof pulls them into the 22% bracket, but (if they use T-IRA assets next year) so will paying off the new car. Then, that trip of a lifetime, then the new boiler, then painting the house ... then paving the driveway ... then ... point being it probably best to plan that they will tilt into the 22% regularly.

One way to play this is - before pension and SS - to rely primarily on T-IRA assets and only use the Roth funds necessary to keep them out of the 22% bracket. Then once the pension and SS kicks in, save the remaining Roth assets for the widow/er. There is also something to be said about the advantage of using those Roth funds earlier when the dollar is stronger, than later in life.

Hope that helps.

 

[JBTX]

OK, I have gotten some additional info, if this helps.

• Loan interest rate: 6.5%
• Loan amount: about $33k. (total interest just under $6k)
• They assure me there is no early payoff penalty
• Roth Balance: about $120k, invested in total stock market index
• T-IRA balance: about $1.1M, invested in total stock market index/Int'l index/Money Market
• When pension and SS kicks in, probably just under $100k per year
• No significant savings other than Roth and T-IRA
• $40k from part-time work, mostly to pay for medical/dental/vision (retiree plan, not ACA)
• They hit the 22% bracket this year, mostly due to T-IRA withdrawal to pay for new roof
• I don't see that IRMAA or 24% bracket will ever be a danger
• 2025 taxable income somewhere around $120k (and that is with the approx $20k w/d to pay for roof)

Seems like my SAT math was pretty good!