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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.

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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.

Please update me on your progress by posting updates here in the comments section of your question. I’m very interested in how this works out for you.

Sincerly,
Steve

You are not alone. I'm here to help. There is no need to suffer in silence. We can get through this. Tomorrow can be better than today. Don't give up.

P.S. Be sure to read ‘The Secret of Surviving Through Difficult Economic Times. What I Learned On My Journey‘.




About the author

Steve Rhode

Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.

2 Comments

  • Both spouses are either at or over age 65. So, what penalty are you talking about for withdrawing from the IRA accounts?

    • You are correct. They will not pay an early withdrawal tax penalty but will pay a general penalty for taking money out if they don’t have to. I sure could have worded that better in 2009. Thanks.

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