Loan instead of distribution

[kongmen]

Is it a good tax strategy to take out a home equity loan for retirement funds in place of a distribution from an ira that would cost in the 20 something tax bracket?

I'm probably missing something obvious but I still would like to know.

 

[RetiredHappy]

It depends on your age and the size of your IRA. For many years, we have been using taxable funds and now all of a sudden we realized that my spouse's IRA has gotten so large that it has become a significant financial liability - higher tax bracket if one of us dies (32%) and higher IRMAA bracket (current and future).

 

[kongmen]

61 years old...hummm the demise and the IRMAA angel certainly is something I need to consider. Thanks.

 

[TheWizard]

It's best to arrange your finances, where possible, so that your AGI grows approximately with inflation through the entirety of your remaining lifetime, with no big jumps when SS and RMDs start.

There are various ways of dealing with finances after death of first spouse, depending on offspring, for instance...

 

[Stormy Kromer]

It depends on your age and the size of your IRA. For many years, we have been using taxable funds and now all of a sudden we realized that my spouse's IRA has gotten so large that it has become a significant financial liability - higher tax bracket if one of us dies (32%) and higher IRMAA bracket (current and future).

I was complaining about something similar and and old friend said "yea, you've got problems".


He put me in my place, not to complain about too much money.....

 

[pb4uski]

Is it a good tax strategy to take out a home equity loan for retirement funds in place of a distribution from an ira that would cost in the 20 something tax bracket?

I'm probably missing something obvious but I still would like to know.

It depends. If you use the proceeds from a home equity loan for spending now, what will your tax rate be when you are in your 70s and have SS, pension (if any) and RMDs? I suspect more than the 20 something percent that you would pay now.

 

[Texas Proud]

As others have said there is no clear answer without knowing more...

But... are you going to creating an even worse situation by not taking money out now? When RMDs hit there is not much you can do then...

 

[TheWizard]

It depends. If you use the proceeds from a home equity loan for spending now, what will your tax rate be when you are in your 70s and have SS, pension (if any) and RMDs? I suspect more than the 20 something percent that you would pay now.

Correct, hence my post #4 in this thread...

 

[mrfeh]

Is it a good tax strategy to take out a home equity loan for retirement funds in place of a distribution from an ira that would cost in the 20 something tax bracket?

I'm probably missing something obvious but I still would like to know.

Not always prudent to focus just on taxes.

If you do this, you are effectively using leverage for your investments. Not something I would do.

 

[street]

I was complaining about something similar and and old friend said "yea, you've got problems".


He put me in my place, not to complain about too much money.....

Yep, that would be a humbling statement. I look at it as I would rather pay tax at a higher rate then not have to pay any tax. You pay tax on the stash no matter what, it comes down to when you want to pay the tax.

 

[COcheesehead]

Another reason why having some (or sizable) funds in a taxable account when retiring early is a good idea.
As to the OP’s question. You have to pay the tax sometime.

 

[Jerry1]

Another reason why having some (or sizable) funds in a taxable account when retiring early is a good idea.
As to the OP’s question. You have to pay the tax sometime.

Plus, at 6%+ for the interest rate on the loan, you have a significant expense to cover. How comfortable are you that your investments will earn over 6%? That’s pretty close to the average historical return of the S&P. It was different when interest rates were around 3%. I think those days are gone.

 

[pb4uski]

Usually, the strategy the OP proposes is used to generate taxable account funds to avoid the 10% early withdrawal penalties for withdrawals before 59-1/2. Since OP is over 59-1/2 they are probably better off with tax-deferred withdrawals unless they have unusual circumstances.

 

[pjigar]

You will eventually have to pay the loan with "after-tax" money anyway. At which point, you may be in the worst situation tax wise (IRMAA, RMD, SS, etc.). YMMV.

I would dare to speculate about your idea. You may have read/heard about this idea in context of how rich people live using tax free loans! They are playing a different game: they can take more loans to make payments on existing loans until they die. Upon death, their heirs get step up basis and loans can be finally paid off using tax free money. If you can't afford to do this then this idea can backfire. This idea is questionable IMHO because unless the interest rate on the loan is minuscule, the total interest paid on the loan over the years can wipe out any tax benefits. May be I am missing something because I am not rich!

Side note: tapping into such loans is best used as a bridge loan for a few months or couple of years.

 

[Koolau]

There are a lot of moving parts in this kind of gambit. You might consider professional help if you can't figure the tax and other angles on your own. I'm guessing you don't want to present figures here but there are those (I'm not one of them) who could likely give you some guidance with the actual numbers but that's your call.

Best luck in figuring this out. As pointed out, it's a First World problem that is good to have.