Major Purchase: Tap IRA or finance?

[SantaClaus]

First, I know, this is a question for my financial planner and tax attorney, but I thought I could get enough advice to frame my thinking on this. So if you have helpful advice you'd like to share, please do.

We are considering purchasing a motorhome to use for 4-5 years of extensive traveling, to get it out of our system. We would be buying used to minimize depreciation. The type we are looking at would cost about as much as 10% of what we have in our IRA. I'm wondering if it would be better to tap the IRA and pay cash or should we finance? I know that we'd have to pay income tax for the amount we withdraw. We would also lose the gains we would earn by keeping those funds in stocks and bonds. But financing comes with interest. Though, a motorhome counts as a vacation home and the interest is deductible. Are there any other benefits or hazards I haven't considered? TIA

[leftyf]

Do like we did when we bought our house. It was the advice from our Financial Adviser and our Accountant. Pay the minimum down payment required then finance the rest. Get your Financial Adviser to automatically withdraw the payment from your IRA every month and direct deposit it into your bank account. Then do a direct payment from your bank account for the motor home. This way, you are only withdrawing a minimum amount every year and it keeps the taxes very low and your money should grow more than enough to cover the payments so you never miss it. Our house is like we got it for free. Hope this helps.

[scroll]

Older people make this mistake so many times as they enjoy being debt free. It is a simple net present value calculation depending on your cost of money. That being said if the motor home was 100,000 the difference would likely be only 2 to 3 thousand dollars difference at most or if one was to live 85 years it would cost 9 cents a day. So do what you feel is best and enjoy your travels but if every penny counts you should finance it for many reasons that would be revealed in a NPV calculation.

[l2ridehd]

I would use a home equity loan if possible to get a lower interest rate and be able to negotiate a cash deal for the motor home. You also will be able to deduct the interest, buy the home for cash (hopefully at a lower price) and not pay any taxes on IRA money. If necessary pay the HELO with IRA money but only withdraw monthly as needed.

A lot may depend on tax bracket, available HELO or finance rates of interest from the dealer where you buy or bank. Run all possible options and make the best decision that works for you.

[kettlecove]

Do like we did when we bought our house. It was the advice from our Financial Adviser and our Accountant. Pay the minimum down payment required then finance the rest. Get your Financial Adviser to automatically withdraw the payment from your IRA every month and direct deposit it into your bank account. Then do a direct payment from your bank account for the motor home. This way, you are only withdrawing a minimum amount every year and it keeps the taxes very low and your money should grow more than enough to cover the payments so you never miss it. Our house is like we got it for free. Hope this helps.
Thanks for sharing that advice Leftyf. You helped me make a decision also!

[Villager Dude]

Thanks for sharing that advice Leftyf. You helped me make a decision also!

I like keeping the IRA money working until you are required to take it after you turn 70.5 years old.

I like the Home Equity Line if you have it.

I like financing at low rates but not sure what rate you can get for a Motor Home.

I would also look into renting if you were going for a short period of time but it may not work out for trips over a year but I would ask the question what it would cost.

The real decision rests with what pockets of money you have for retirement and how much you will depend on them. If the IRA is not important for daily living then I like the monthly withdrawal program as cited by another poster.

Enjoy , Something I have always wanted to do. Met someone here in The Villages that did this very same thing for 15 years.

[tcxr750]

Could you finance with a Home Equity loan? Interest may be deductible. I think if you take $$$ out of your IRA that would be added to your taxable income and that could be taxable at a higher tax rate.

[DigitalGranny]

All the advice above is great. You didn't ask, but I think the biggest lever is buying cheap. Look online at pplmotorhomes.com. It's a consignment place in Houston. My husband and I bought a used motorhome that had only 26,000 miles on it, cost over $85,000 new and we paid only $18,500 for it. Four years later, it has turned out to be one of best purchases ever! It cost us nearly $1000 to drive our car there, staying in motels, and we rented a uhaul to pull our car back home behind it. Still, we paid over $15,000 less than similar coaches in our area ( OH). The salespeople do not work on commission. They were very helpful

[Allegiance]

First, I know, this is a question for my financial planner and tax attorney, but I thought I could get enough advice to frame my thinking on this. So if you have helpful advice you'd like to share, please do.

We are considering purchasing a motorhome to use for 4-5 years of extensive traveling, to get it out of our system. We would be buying used to minimize depreciation. The type we are looking at would cost about as much as 10% of what we have in our IRA. I'm wondering if it would be better to tap the IRA and pay cash or should we finance? I know that we'd have to pay income tax for the amount we withdraw. We would also lose the gains we would earn by keeping those funds in stocks and bonds. But financing comes with interest. Though, a motorhome counts as a vacation home and the interest is deductible. Are there any other benefits or hazards I haven't considered? TIA


Mr. S. Claus,

Wow, good luck. We are looking forward to doing that soon. Keep everyone posted or better yet, take a few Villagers with you for luck.


J/R

[leftyf]

I also like my IRA, but as soon as I turned 59 1/2, I began drawing out the max that my accountant could write off and put it in a Roth IRA. That way when I turn 70 1/2, the amount I must draw from my regular IRA is vastly reduced I can withdraw tax free at any time from my Roth IRA. Don't leave all your money in a regular IRA until you turn 70 1/2, the taxes will be much higher.

[buzzy]

First, I know, this is a question for my financial planner and tax attorney, but I thought I could get enough advice to frame my thinking on this. So if you have helpful advice you'd like to share, please do.

We are considering purchasing a motorhome to use for 4-5 years of extensive traveling, to get it out of our system. We would be buying used to minimize depreciation. The type we are looking at would cost about as much as 10% of what we have in our IRA. I'm wondering if it would be better to tap the IRA and pay cash or should we finance? I know that we'd have to pay income tax for the amount we withdraw. We would also lose the gains we would earn by keeping those funds in stocks and bonds. But financing comes with interest. Though, a motorhome counts as a vacation home and the interest is deductible. Are there any other benefits or hazards I haven't considered? TIA

We just did the finance instead of using IRA. Only we bought a new motor home. Fortunately we can make the payment without touching the IRA. The yield in the IRA offsets the interest on the RV loan.

We are hoping for five years of long distance travel around the country, followed by five of planting it wherever turns out to be our favorite place.

After putting IRA money toward buying the house, the income tax was painful, it bumped us up two tax brackets, and raised our Medicare payment. Never again.

[SantaClaus]

Thanks for the feedback guys. The warning about crossing brackets is well-heeded, and perhaps if we find ourselves toward the bottom of the bracket a few years we will pull a bit more out and set aside (in CDs perhaps) to later apply to the purchase. We are planning on doing this a few years down the road, as we get toward the end of our renovation, while our house is on the market, and for maybe the first couple of years at TV. I'm not keen on dumping a lot of cash on rv storage so I want to get the wanderlust out of our blood in relatively short order. We have been RVing for years and have had a small motorhome in the past and have a large (to us) travel trailer currently. Our longest trips to date have been about 1 month, so the opportunity to head out for 3-4 months seems like quite an adventure!

Again, thanks for all the feedback.

[wendyquat]

While on that subject what does it cost to store an RV in TV. It's our opinion that the storage fee, insurance costs and low gas/diesel mileage would not make it very practical! Just curious how others do it in TV!

[JMEZARIC3]

First, I know, this is a question for my financial planner and tax attorney, but I thought I could get enough advice to frame my thinking on this. So if you have helpful advice you'd like to share, please do.

We are considering purchasing a motorhome to use for 4-5 years of extensive traveling, to get it out of our system. We would be buying used to minimize depreciation. The type we are looking at would cost about as much as 10% of what we have in our IRA. I'm wondering if it would be better to tap the IRA and pay cash or should we finance? I know that we'd have to pay income tax for the amount we withdraw. We would also lose the gains we would earn by keeping those funds in stocks and bonds. But financing comes with interest. Though, a motorhome counts as a vacation home and the interest is deductible. Are there any other benefits or hazards I haven't considered? TIA

A RV is not an investment.After 5 years your RV is worth a lot less than you paid.A RV is a life style.If you cannot afford the monthly payments without using your retirement funds,don't buy.You can stay many nights at the Holiday Inn for the cost and expense of a RV.
Do not finance the RV for 15 years,the most commonly quoted monthly payment in the RV dealer ads. You will be upside down for 14 years.Payoff the loan in 5 years.
But if you have money in your retirement fund that you will never need.Buy the RV.Don't worry about the kids.

[SantaClaus]

A RV is not an investment.After 5 years your RV is worth a lot less than you paid.A RV is a life style.If you cannot afford the monthly payments without using your retirement funds,don't buy.You can stay many nights at the Holiday Inn for the cost and expense of a RV.

Do not finance the RV for 15 years,the most commonly quoted monthly payment in the RV dealer ads. You will be upside down for 14 years.Payoff the loan in 5 years.

But if you have money in your retirement fund that you will never need.Buy the RV.Don't worry about the kids.


Wow, ok. I'm going to try to take this as an attempt to be helpful rather than condescending, but it won't be easy. As you'll see above, we have been RVing for years, so we know that it is not the most economical means of travel. We are not considering buying new, and thanks to our depth of experience, we know what a good deal is and won't accept a bad deal.

And no, we "cannot afford" the motorhome without using our retirement funds... that is our ONLY source of income (well, except the pittance I extract from my Santa activities). Where does this advice come from? Isn't this the purpose of "retirement funds", to fund our retirements? Pension was a lump sum, rolled into IRA, and we are delaying SS so what other source would one tap for such a purpose? We don't have a fat trust fund, and we aren't selling a $2M house moving into a $300K 2/3+den. For us, either we draw from the IRA monthly to pay a note, or we draw once and pay cash... I don't see a third way.

We have no interest in paying off a motorhome, or treating it as an investment. We want to buy it as cheap as we can, enjoy it for a few years, and sell it for as much as we can; and hope the difference between the two is one we will consider worth the expense in memories and time together.

Finally, no, I'm not worried about the "kids"... he will be in his 60s by time we kick, and our granddaughter will be about 40. As long as we don't linger into our upper 90s they will inherit too much, in my book, enough to really screw up their sense of self-reliance. Thank you for being so concerned about them, though.

[buzzy]

A RV is not an investment.After 5 years your RV is worth a lot less than you paid.A RV is a life style.If you cannot afford the monthly payments without using your retirement funds,don't buy.You can stay many nights at the Holiday Inn for the cost and expense of a RV.
Do not finance the RV for 15 years,the most commonly quoted monthly payment in the RV dealer ads. You will be upside down for 14 years.Payoff the loan in 5 years.
But if you have money in your retirement fund that you will never need.Buy the RV.Don't worry about the kids.

I expect to be upside down when I sell it in 5 - 10 years. That's part of the cost of ownership. I know that some say to never finance a depreciating asset. But, the tax burden of drawing from an IRA changes the situation. Down the road, I'll take something out of the IRA to cover the shortfall, and only pay income taxes on that amount.

[rjm1cc]

I think I would look at financing if you can get a good interest rate. Your tax situation over you life would be important so ask your adviser if it isn't better to let the IRA alone.
Question if you paid taxes on the IRA funds how would this compare to interest on the loan. Would you be better off with a personal loan and taking a little out of your IRA each year to pay off quicker than just monthly payments. Assume you do not have withdraw penalties due to age.

[TexaninVA]

Do like we did when we bought our house. It was the advice from our Financial Adviser and our Accountant. Pay the minimum down payment required then finance the rest. Get your Financial Adviser to automatically withdraw the payment from your IRA every month and direct deposit it into your bank account. Then do a direct payment from your bank account for the motor home. This way, you are only withdrawing a minimum amount every year and it keeps the taxes very low and your money should grow more than enough to cover the payments so you never miss it. Our house is like we got it for free. Hope this helps.

Somehow, when you say you got it for "free," it just seems like that's too good to be true in the real world and that, over time, it will not prove to be the case.

[Villageswimmer]

I expect to be upside down when I sell it in 5 - 10 years. That's part of the cost of ownership. I know that some say to never finance a depreciating asset. But, the tax burden of drawing from an IRA changes the situation. Down the road, I'll take something out of the IRA to cover the shortfall, and only pay income taxes on that amount.


All of these strategies seem to make sense to some degree. I guess it's critical, though, to keep in mind the fact that sooner or later, taxes will need to be paid on the IRA funds--by you or your heirs. I don't know, but depending on individual circumstances, it might be good to withdraw IRA dollars rather than pay loan interest. Possibly a combination of both would be ideal. JMO.

[Villageswimmer]

Forgot to say I think it's cool that you're following your dream. I hope you enjoy your RV a long time!

[jimmy D]

Free who are you kidding?? Not all Ira s grow everyyear back to Free come on now who are your kidding???? Its a good idea but free

[wendyquat]

Free who are you kidding?? Not all Ira s grow everyyear back to Free come on now who are your kidding???? Its a good idea but free

I'm glad someone else found this odd! I went to bed trying to figure it out! Thought maybe I was missing something! :22yikes:

[2BNTV]

Please keep in mind, no institution will give you a HELO, if you home is on the market for sale!!!

I like the idea of financing, while your money is growing, tax deferred. You can make payments and minimize the effect of having a chunk of money withdrawn, and with tax implications.

I think it is smart to buy a used motor that has a depreciated value, and resell it when you are through with it. This will minimize the monies spent on it, and the money needed to be withdrawn in small amounts, over the payment period.

Almost all parents want to leave their children something. Their children will appreciate the efforts of the parents, to give them, some financial stability.
Never forget, it's your money, to do as you please.

Do whatever is best, that lets you sleep at night, with your decision. :smiley:

[SantaClaus]

I like the classic formulation regarding inheritance, "Leave your kids enough that the can do anything! but not so much that they can do nothing!" Wish I knew the attribution. Like I said above, unless we live far longer than expected (given current health and family histories) then we will be leaving a little too much for their own good. Even if we linger into our mid- to late-90s then we will be leaving them our home and possessions, which will liquidate to no small sum. Of course, something catastrophic could happen to deplete our funds and all we leave the kids is the junk we couldn't pawn and a fat reverse mortgage!

[2BNTV]

I like the classic formulation regarding inheritance, "Leave your kids enough that the can do anything! but not so much that they can do nothing!" Wish I knew the attribution. Like I said above, unless we live far longer than expected (given current health and family histories) then we will be leaving a little too much for their own good. Even if we linger into our mid- to late-90s then we will be leaving them our home and possessions, which will liquidate to no small sum. Of course, something catastrophic could happen to deplete our funds and all we leave the kids is the junk we couldn't pawn and a fat reverse mortgage!

:agree:

It's all guesswork when it comes to our health.

Went to a reverse mortgage seminar and I came away thinking I could never do that to my son. It just another way to spend more money, and leave your kids less. I'm sure in some cases, it may be a necessary evil.

A friend of mine father is 79, Took out a reverse mortgage for 100K and spent it in two years on stupid stuff. IMHO

He looks good, smells good, and is broke, comes to my mind. :D

[leftyf]

The reason I say "Free" is because we take $1,000 a month from our conventional IRA to pay the house payment. It is paid bi-weekly to give a shorter payback time. The $12,000 a year we withdraw from our IRA is a minimal amount and our earnings over the past have far out paced this amount. We look at it as we just reduced the earnings on our IRA. We withdraw so little this way that our taxes on this money are usually nothing. Our accountant then tells us how much more we can transfer from our conventional IRA to our Roth IRA before we have to pay any taxes. Talk to your accountant, A good accountant is kind of expensive, but he should be worth it. He is not just there to do your taxes once a year.

[2BNTV]

The reason I say "Free" is because we take $1,000 a month from our conventional IRA to pay the house payment. It is paid bi-weekly to give a shorter payback time. The $12,000 a year we withdraw from our IRA is a minimal amount and our earnings over the past have far out paced this amount. We look at it as we just reduced the earnings on our IRA. We withdraw so little this way that our taxes on this money are usually nothing. Our accountant then tells us how much more we can transfer from our conventional IRA to our Roth IRA before we have to pay any taxes. Talk to your accountant, A good accountant is kind of expensive, but he should be worth it. He is not just there to do your taxes once a year.

Good advice. :smiley:

BTW - My accountants nickname is lefty. :D

[SantaClaus]

Totally agree on the reverse mortgage, it should be a last resort. If nothing else the origination fees are ridiculous.

[tcxr750]

I also like my IRA, but as soon as I turned 59 1/2, I began drawing out the max that my accountant could write off and put it in a Roth IRA. That way when I turn 70 1/2, the amount I must draw from my regular IRA is vastly reduced I can withdraw tax free at any time from my Roth IRA. Don't leave all your money in a regular IRA until you turn 70 1/2, the taxes will be much higher.

I have thought of doing a partial rollover from my IRA to a Roth for several years. My Investment Adviser and Accountant both presented arguments against doing a rollover. Using a Fidelity Minimum Required Distribution Calculator, I got a rude awakening. The value of my IRA peaks at age 81, but the RMDs keep getting bigger. I'm assuming a conservative 6% return per year.
Assuming retirement income from Social Security and pensions goes up every year and adding IRA distributions...a higher tax bracket is inevitable.
I would ROTH IRA it all. Oops, I'm 70+!