Pay cash from IRA or lease car


Dryer sheet wannabe
Dec 18, 2003
Does it make sense for a retired person to remove all the cash necessary from an IRA and pay the taxes to purchase a car?

Would it make more sense to purchase on time or lease as the taxes on the IRA withdrawals per year could be in a lower tax bracket and the principal could continue to grow? :confused:

I believe you should have savings outside of IRA's to pay for things like cars, repairs, etc.

Your question would be impossible to answer without much more information. (If that is the only way to pay for car, it is probably a toss up).

I personally look at my IRA savings as the last to go.

I agree with Jarhead. My IRA will be the last to get
tapped. So far I have sailed right past 59 and a half
without getting into that money Once would have thought that impossible. So, for me, the IRA is the
most "forever" of my "forever money".

John Galt

I agree with jarhead that it's best to have funds outside of an IRA to use for such things as buying a car. Absent such funds, I suspect the cost of financing or leasing is likely to be less than the taxes that would need to be paid if the funds were withdrawn from an IRA. Furthermore, funds, once removed from an IRA, often can't be returned to a tax sheltered environment. Bottomline: Finance or lease the car; don't take the funds from your IRA. Then build up an auto replacement fund outside of the IRA for next time -- at least 10 years down the line.

Popyee, I don't know your age or financial circumstances, but I would venture a guess that at some point (maybe 30's or 40's) many who are able to retire early max out their IRAs, max out their 401K's/403B's, and on top of all of that, they also sock away almost as much in taxable accounts. Some even contribute to a defined benefit pension plan at the same time. I did that for 13 years. Tapping an IRA would have been unthinkable and unnecessary once I set my mind on early retirement. Before that, or I should say before I read Terhorst and understood the possibilities, I had almost nothing in savings, so a great deal depends on your stage in life. The point I want to make, however, is that this business of ER required an intense commitment and discipline over a fairly long period of time for many of us.
As others have already pointed out neither of those are very good options.  If you don't have any taxable savings then perhaps you should delay buying the car.

Assuming those are the only possibilities, taking out a market rate car loan (a substantially below market rate loan may be worthwhile on its own merit) to delay withdrawals from an IRA will make sense only if later IRA withdrawals will be taxed at a lower rate.  Even though a 4% 3-year loan may sound like a low rate, your 2-year bonds are yielding less.
Agree with all of the other posters. Drawing from an IRA with penalty is probably the worst thing that you could do for preparing for Financial Independence.
to delay withdrawals from an IRA will make sense only if later IRA withdrawals will be taxed at a lower rate.  Even though a 4% 3-year loan may sound like a low rate, your 2-year bonds are yielding less.

I disagree, bongo2. Taxes on the funds withdrawn really do matter. An annual draw might be less, and thus taxed at a lowerrate, than a one time draw to buy a car.

I'm retired and wouldn't have a penalty --just taxed at ordinary income rates.

I appreciate all your comments -- I'm still thinking.
Five years ago, bought a new truck on time (9% ?) because selling some 'hobby' stocks would have 'lost' a 5-8% income stream. Now with the truck paid off this year - those stocks with div raises and compounding are yielding 10-14% on original $. The payments were included in the 'core' budget. Sitting down and playing with the numbers for 'your' situation might lead you to some interesting possiblities. The gamble is to make 'guesses' as to investment opportunities and taxes.
Idea: invest in a coin that has a different scene on each side. Place the coin on your cocked thumb, release it and notice how your coin is released into the air in a tumbling manner. Before the coin hits the ground (gravity will insure that it evantually does) declare which one of the afore mentioned scenes you prefer and compare that to what scene appears upright when the coin lands on the earth's surface.

OR If you are over 59 1/2 and you will be paying for the lease or car payments with IRA money anyway, why not go ahead and take it out now, pay for the car, pay the IRS the taxes and you're done.

Alternate idea: Keep you money and take the bus or walk.
Here is a twist on the IRA withdrawal conundrum.
I have not yet drawn on my IRA, although I now could,
penalty free. My intention was for the IRA to be a
major part of my retirement income. I also can draw
dividends from my personal holding company, which
is necessary if I am to avoid PHC tax penalties.
I can do one or the other, but prefer not to do both
as that would result in my personal income being
taxed, whereas now I can keep it low enough to
result in -0- income taxes. Anyway, I won't know until
very late in the year if I need to pay dividends.
Thus, I am holding off on any IRA withdrawals until
I know if dividends are beneficial. In the meantime,
I have to scrape along as best I can. Of course, this
is far better than having no money to worry about.

John Galt
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