Knowledgebase
Retiree Income Tax Question #381257
Asked January 05, 2017, 4:53 PM EST
I'm a 69 yo retired guy who bought a new car last year and financed a part of
it. The payoff is now about 20.5K and its a 4% loan. I'm considering cashing in
one of my IRA accounts (worth about 16.5K), and using it (plus taking another
distribution of 4K from a different IRA acct.) to pay off the loan. All my IRA's are of the traditional type and I'm a single guy with an annual social security income of 25.8K and an adjusted gross around
3.5K.
My question is this: will the additional tax I'll owe (from my
Social Security getting taxed) be less than the interest income I would
have payed had I kept the car loan? (since, with the IRA distribution, my income will likely exceed the combined or "provisional income" limit of 25K) Or
alternately, what about paying just the 16.5K now and the remaining 4K in a year?
Thanks!
Valley County Idaho
Expert Response
This is an opportunity cost question. In other words , if you do one thing with your money, you cannot do others. The best way to answer this question is with some online calculators and tax info. With a low AGI, you are currently in the10% tax bracket. See http://njaes.rutgers.edu/money/taxinfo/marginal-tax-brackets.asp?2017. Your future ordinary income, including IRA withdrawals, will be taxed at one of the tax rates shown on the chart. You can use these calculators to estimate the interest on the car loan: http://apps.finra.org/Calcs/1/Loan and http://www.bankrate.com/calculators/mortgages/loan-calculator.aspx
Thanks for the reply Dr O'neill,
Sounds to me like I would be better off taking 3 smaller distributions over two or three years and making two or three balloon payments (forgot to mention no pre-pymt penalty) so as to keep my combined yearly income below the 25K limit so my social security won't get taxed. Because if I exceed the 25K limit on combined income*, suddenly 50% of the entire SS is taxed at 10%; (or more) which would exceed in one year the total I would pay in interest over the duration of the car loan! (ie. assuming interest in range of $600. to $1200. depending on how rapidly I pay loan off)
*combined income = AGI + 1/2 SS income
