I'm retired. I owe $66,000 on a camper van I bought in 2021. I'm thinking about cashing out a $30000 traditional IRA I have to bring down the loan. Is that a good idea?

[fanfare]

have you reached six months past your 59th birthday? ie age 59 1/2 ?

Generally speaking it's not a good idea if your IRA is growing as it should be.

@larrywa2 

[Opus 17]

What have you been earning in the IRA?  (Depends on your investments and risk tolerance.)

What is the interest rate on the camper loan?

Are you likely to sell the camper?  Do you have other funds you could draw if you have a real emergency?

If the interest rate on the camper loan is higher than the earnings rate on your IRA, then as a purely monetary matter, paying off the loan may be better.  But you need to think about your other resources and other financial needs.

[larrywa2]

I'm 71 and am receiving SS and Civil Service annuity payments monthly.  I'm in the 22% tax bracket.  I do not have to take an RMD for another 2 years.  I have 2 traditional IRAs and the $30000 IRA is the smallest by far.  Instead of rolling it over into the bigger one, I've been thinking of cashing it out to pay down the camper van.  The interest on the loan on the campervan is running about $3600 a year. I'm just concerned there's something I don't know or didn't think about in taking a distribution from the IRA.  Maybe it's just me but IRS rules can be extremely convoluted.

[Opus 17]

@larrywa2 

There are no special tax rules that would trip you up, here.  You can withdraw from your IRAs for any reason, only paying the regular income tax.  What you do with the money after you pay the tax doesn't affect the withdrawal or the tax. 

[larrywa2]

OPUS 17 and fanfare -- Thanks for your replies.  It helps.  I didn't want to confuse my question with details but, since you asked, I owe about $66000 on a 4.99% loan that's costing about $3600 a year in interest and yes, I'm actually thinking about adding $36000 of non-IRA funds to the $30000 IRA cash out and paying off the campervan loan and getting the title which will make the van a lot easier to sell which I am also thinking about doing. Whew.  As I said, my main concern is that I don't trigger some obscure distribution tax or fee or assessment or levy or whatever other word the IRS uses to collect money. I do understand that 22% of 30000 is more than $3500 but there are other expenses to owning this campervan that might make it worth just paying off the loan and selling it.

[Opus 17]

@larrywa2 

As I said there are no special tax rules that will trip you up here.

Financially, I would look at your IRA investment returns.  This is a fairly complicated topic and I can only touch on it here.  But as a simple example, paying off your camper loan is the equivalent of investing the money at 5%.  Right now, I have a small conservative investment portfolio that returned an average of 4.5% over the past 5 years, and a more balanced portfolio that returned 8% over the same time frame.  Assuming those rates tracked into the future (which is a complicated question all its own) I would be ahead over time if I cashed out the small portfolio and paid off the camper, but I would be behind if I cashed out the more aggressive portfolio because I would be giving up 8% to make 5%.  It would make more sense to invest the other $30,000 in the higher-yield portfolio and then pull the monthly payment out of the IRA each month for the camper, I would be making 8, and paying 5, so I would be slightly ahead.

That ignores the effect of inflation (which makes a fixed payment cheaper in real terms the farther into the future you look), and it ignore the effect of tax rates (the 22% rate will go up to 25% in 2026 if Congress does nothing, while the two presidential candidates have very different ideas about what the tax rates should be in the future).  

If you sell the camper, and have paid it off in full first, what will you do with the sales proceeds?  You can't invest them back in the IRA unless you have compensation from working.  You would have to invest in a regular broker account and pay the yearly taxes on capital gains, interest and dividends.  What can you get for the camper?  If you can get $20,000 (and wow, are you upside down) maybe you should only withdraw $10K and pay off $30K+$10K so you can keep the rest in the IRA.  Would paying off the camper really make it easier to sell?  Why does the buyer care, as long as you clear the lien when they take possession?  If you are underwater you have to pay the bank, of course, but should you pay the bank the whole amount now, or only pay the minimum you need to pay when the time comes?  (Goes back to the investment yield rate compared to the loan rate.)

Anyway, whole books could be written on the subject.  But there are no special tax problems if you withdraw a lump sum to pay off the camper. 

[larrywa2]

Opus 17 - Thanks. That really helps a lot. As you said, it's complicated but it helps to think through all the options.  My biggest question re: the post was whether I'd lose more than the 22% fed tax (nevermind state) and you answered that. Thanks.

[NCperson]

@larrywa2 - there is one "special rule" to consider.....does taking the $30,000 create any IRMAA implications on your Medicare premiums?  If it does, it would only impact your 2026 premiums. 

https://thefinancebuff.com/medicare-irmaa-income-brackets.html

[larrywa2]

NCperson -  Thanks so much. This is exactly the kind of thing I'm talking about!