I only have $78,000. in IRA. Home equity ranges from $120-130,000. in order to replace unsafe 2003 Toyota Sienna, I am considering taking $2-3,000. from IRA. What are choices and consequences? Thank you, Nancy Ingle
Thanks so much for reaching out with a great question on tapping into your IRA. First off, let me congratulate you on what appears to be a good job of getting to where you are. From your online moniker, I’ll assume that you have, or are currently working as a nurse, and that you are around 66 years of age. Although you say you “only” have $78,000 in your IRA, that’s still a lot of money. Also, you have some good equity in your home, so way to go. I like that you seem to be thrifty by driving a 15-year old car. Mine is 25 years old, so I’m really a cheapskate. Anyway, it sounds like you have been doing a lot of things right, financially. So, based on what I know, here are a few resources available to you to get a replacement for the poor old Sienna:
Take out a loan. I’m not sure you could get a loan for such a small amount, the loan processing fees are a factor, and you might be averse to debt, especially if it’s at a high interest rate. The same goes for using your credit card for this kind of need, as it is just another form of a debt obligation.
Home equity. Although you might be able to take out a home equity loan for the purchase, the fees for the loan could be costly and you could be putting your house at risk of foreclosure if you fail to make payments. Another form of using home equity could be a HECM reverse mortgage. These can be a good tool for things like creating income until the start of Social Security, or for covering major out of pocket medical expenses, but less so for small one-time needs like a car purchase.
Tap into the IRA. If it is a traditional IRA, and you are at least 59-1/2, you can take the money out without penalty. As a traditional IRA, the total distribution would still be taxable to you as ordinary income. If your IRA is a Roth, and you are at least 59-1/2 and have had the account open for at least five years, then the distribution would also be penalty free, and tax free. IRAs are meant to be used for retirement wants and needs, and replacing a car is one of them.