Returning funds to traditional IRA

[Mark G]

I am 67 and retired but have not begun withdrawals from my well-funded traditional IRA. We own our home outright – no mortgage. We need a new car, but don’t have the cash for it. What’s the best strategy for buying this car? I have considered a home equity loan and car loans. But those would be paid back with IRA withdrawals anyway. Why not withdraw the full purchase price of the car from the IRA? I would the buy the car, then sell our old car on my own and return the proceeds from that sale to the IRA. If I sold our old car first we would be without a car and under pressure at the dealership to move faster than I am comfortable doing.

1. Is this my best strategy versus some type of loan?
2. Can I deposit the used car proceeds into the IRA?

[Bill Presson]

I recommend speaking with your CPA or financial planner. 

[QDROphile]

You cannot borrow from your IRA. It will be fatal to the tax treatment of the account. There are some fancy techniques with some short term possibilities, but not for civilians.

[Mark G]

On 6/30/2024 at 3:17 PM, Bill Presson said:

I recommend speaking with your CPA or financial planner. 

I speak to him when I look in the mirror. My wife thinks it's weird. Seriously, my experiences with financial advisors has been terrible. We went out on our own 30 years ago and it's been great. 

[david rigby]

IRS link for description of traditional IRA, https://www.irs.gov/retirement-plans/traditional-iras

 

[Lou S.]

You can withdrawal funds from your IRA and roll them back tax free if you do it within 60 days of the withdrawal, but there is a limit of 1 rollover like this per year. And I forget it if it is once per calendar year, once in any 12 month period, or if both apply. I also don't recall if this rule aggregates all of the IRAs you many have or if each one is separate if you have multiple IRAs.

I can't comment on whether or not this is a good strategy, just one that is available.

[QDROphile]

“There are some fancy techniques with some short term possibilities, but not for civilians.”

[Paul I]

@Mark G if you follow your proposed strategy, and the proceeds from the sale of the old car are less than the price pay for the new car, then the net result of the strategy is a taxable withdrawal from the IRA.  For example, assume you have $500,000 in your IRA and take a distribution of $50,000 to buy the new car.  You now have $450,000 left in the IRA.  You sell the old car for $20,000 and deposit the $20,000 in cash into the IRA within 60 days as a rollover.  You now have $470,000 in the IRA and a net taxable distribution of $30,000.

Do you happen to be taking Social Security payments and not have other taxable income that triggers paying taxes on the Social Security payments?  If so, then the taxable distribution could trigger needing to pay taxes on the Social Security payments.

You do not mention what your rate of return is within the IRA.  If your rate of return within the IRA (adjusted for your marginal tax rate you would pay on a withdrawal) is greater than the interest rate you will pay on a car loan, then you are better off taking out the car loan and making the payments over time from your IRA distributions.

If you or your spouse are still working, you have the option to contribute funds received from the sale of the old car.  If you do this, then consider making the contributions to a Roth IRA to keep the contribution and future income from being taxable later (after 5 years) and from being included in the calculation of your required minimum distributions when you reach age 73.

There a lot of variables and assumptions that go into comparing the different strategies.  There are no guarantees that all of your assumptions will accurate, and some strategies will carry a higher risk of unintentionally creating unwanted tax consequences.

If you are adamant about taking the DIY approach, get the best information you can about the price you will pay for the new car, the proceeds you can reasonably expect from the sale of the old car, the likely terms of taking a car loan, any of your and your spouse's expected earnings from employment, a reasonable estimate of the investment performance of your IRA over the next 5 to 7 years, your marginal tax rates, start dates and amounts of any Social Security payments to you and your spouse, and any other factors.  Write them all down, and do the math.  If you think you are good to go, then ask someone you know and trust or ask a professional who is financially savvy to review your work and help you assess the risks.

May you find a clear path forward.

[Mark G]

On 7/3/2024 at 5:09 PM, Paul I said:

@Mark G 

Regarding your first paragraph with the illustration, yes, I understand and that was my understanding, but I wanted some verification from strangers on the interwebs and you have provided it. Thanks.

"...then the taxable distribution could trigger needing to pay taxes on the Social Security payments."

We are already in the 85% taxable category. I don't think the proposed withdrawal will add more SS tax, correct?

"You do not mention what your rate of return is within the IRA.  If your rate of return within the IRA (adjusted for your marginal tax rate you would pay on a withdrawal) is greater than the interest rate you will pay on a car loan, then you are better off taking out the car loan and making the payments over time from your IRA distributions."

EXCELLENT point. This is why I came here - to get perspectives I hadn't thought of. I'll get out my crystal ball and investigate IRA returns for the next few years, which have been pretty good.

"If you or your spouse are still working..."

We are both retired.

"If you are adamant about taking the DIY approach..."

I am. My experience with paid advice has been horrible.