Should We Take Money From Our IRA to Buy a Car? – Brenda

“Dear Steve,

Retired – husband 69 and I am 65

Husband worked for a now defunct airline for 28 years so pension is minimal from PBGC. I have an IRA worth about $210K (withdrawing $10K lump sum annually). We are both currently collecting social security. My husband has two part-time jobs and I have one part-time job producing an insignificant income. Our house payment is $1575 per month and we have two aging automobiles…1998 with 186K miles and 2004 with 110K miles. We need to buy another car and wondered if I should take the money from my IRA to buy a used car. We are currently very tight with out monthly expenses and having a car payment would really be confining for us. I know we are looking at approx. 10% taxes if we take the money from the IRA vs. a lower interest rate for monthly payments but it would really be tight to add more debt per month.

Your thoughts please.

Should I take the money from my IRA to purchase a used car knowing I will be paying more in interest than on a conventional car loan???

Brenda”

Dear Brenda,

My gut reaction is don’t do that. Not only will you pay a penalty but you will lose whatever growth that money will make if you leave it in as long as possible.

There are enough good car loans out there right now for you to examine those first. For example, eLoan.com offers used car financing for people with good credit, which it sounds like you have, for 5.69%. If you see what eLoan.com will qualify you for you can then go into the used car dealer, like CarMax and ask them to beat that offer. If they can’t then you’ve got a good deal. They’ve always beat it for me.

I think the goal here is to not set your sights too high for a luxury car. You need reliable transportation. I’d look at a car that was about three years old so you can get the maximum depreciation but still get a relatively new car.

So I took a look on CarMax.com for a car that looks like it would meet your needs. I found a 2006 Mitsubishi Lancer ES with 34,000 miles for $9,849. The monthly payment on that car would be about $188 a month.

I realize that your issue is one of monthly cash flow but do you think that $188 a month is doable for you? If it makes it too tight then consider upping your annual withdrawal to $12,500. The extra money will cover the car payment and you can leave the maximum amount in the IRA to grow.

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