I have a small - $25K - IRA making 3% fixed.

My truck loan balance is ~$20K at 5.74%

Does it make sense to withdraw from the IRA to pay off the truck?

I'd love to help but I cannot provide specific or tailored advice on the internet... and I am not licensed to do so in Maine.

Having said that, there are many factors involved. How many other retirement assets do you have? Why is the IRA only earning 3% fixed?
You may be able to earn more.

Generally, it is a good idea to pay off debt but not necessarily in all cases.

I know many others will expound upon this.

If the IRA is a traditional it may be taxable. The 20,000 if taxable will be taxed at your highest marginal rate when added to the lost 3% may far exceed the 5.74%.

According to a brief chat with my agent, the standard tax rate for withdrawal is 10%. Unclear whether that's the total for both Federal and State or whether the State takes another 10%.

Best case, I'd be paying ~$22K to pay off a $20K loan if I understand correctly.

If I let the loan continue as is, interest would be a shade over $2400.

The IRA is at 3% because it's CD based and fixed and that was the rate when originated. I am 75 and extremely risk averse.

One result of paying the loan off now would be re-directing the payment into a higher interest on-line savings program so what little income the IRA is providing at the moment wouldn't be missed.

quote:

According to a brief chat with my agent, the standard tax rate for withdrawal is 10%. Unclear whether that's the total for both Federal and State or whether the State takes another 10%.

10% is the standard withholding for withdrawal. The actual tax rate cannot be determined until you do your taxes. It will be taxed at your highest marginal tax rate, so it depends on your other income.

^^^ chellim is right. The 10% is a withholding. I'd rather call it a penalty. Tax on top of that.

I personally wouldn't do it.

I pay very little tax as my income consists of a military pension, my SS and the wife's SS. There are breaks built into both sources.

I suspect that I'd get at least some of the 10% back.

Still mulling it over, but thinking I'll wait until after the first of the year for a couple of reasons:

1. Loan paid down further.
2. Defer the tax hit for another tax year.
3. See how election results affect finances.

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I suspect that I'd get at least some of the 10% back

As others have said the 10% has nothing to do with your marginal tax rate. To get close to the tax cost use your 2025 tax return and add $20000 as a taxable 1099R. The new result should be close if you will have similar taxable items.

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Originally posted by Anush:
As others have said the 10% has nothing to do with your marginal tax rate. To get close to the tax cost use your 2025 tax return and add $20000 as a taxable 1099R. The new result should be close if you will have similar taxable items.

My financial literacy is pretty limited. Are you saying that the government keeps the 10% plus I pay income tax on top of that?

Age 59½ and Older: You can withdraw any amount from both Traditional and Roth IRAs without the 10% early withdrawal penalty. (Note: Traditional IRA withdrawals are still subject to ordinary income tax).

I'm 75

I would not do it, based on sage advice from my father years ago. A sum of money like that cannot be easily replaced, even on time. Better to keep it, unless in an emergency situation.

quote:

Originally posted by stiab:
I would not do it, based on sage advice from my father years ago. A sum of money like that cannot be easily replaced, even on time. Better to keep it, unless in an emergency situation.

A lot to be said for that. The only reasons I'm even considering it are that A) I have a cash reserve of a similar amount and B) The IRA is not really liquid in an emergency.

quote:

My financial literacy is pretty limited. Are you saying that the government keeps the 10% plus I pay income tax on top of that?

No, the 10% is just a withholding amount and has nothing to do with taxes owed.

quote:

Originally posted by Anush:

quote:

My financial literacy is pretty limited. Are you saying that the government keeps the 10% plus I pay income tax on top of that?

No, the 10% is just a withholding amount and has nothing to do with taxes owed.

So if the actual tax is less than the 10% withholding, it'll show up as a refund?

I understand wanting to be debt free. I also paid off a 3.25% mortgage when I was getting higher savings interest. My reason is at 81 I may go at any time and my wife could not live having to make a mortgage payment.

quote:

So if the actual tax is less than the 10% withholding, it'll show up as a refund?

Yes

Google AI says.... Nope


The Tax Ramifications

A traditional IRA is tax-deferred, meaning you pay federal (and potentially state) income tax the year you withdraw the money. To get the $20,000 net cash needed to pay off the truck, you have to withdraw a much larger "gross" amount to cover the taxes.

Estimated Federal Tax Bracket Gross IRA Withdrawal Needed Cash Left for Truck Upfront Tax Bill
12% Bracket $22,727 $20,000 $2,727
22% Bracket $25,641 $20,000 $5,641

• Draining your nest egg: If you are in the 22% bracket, you would actually wipe out your entire $25,000 IRA just to pay off a $20,000 loan.

• The "Tax Drag" vs. Interest Savings: Paying $2,700 to $5,641 in upfront taxes completely erases the gradual interest savings you would get from wiping out a 6% loan.

• Social Security & Medicare Trap: Adding a lump-sum withdrawal of $22,000+ to your annual income could inadvertently push you into a higher tax bracket, cause more of your Social Security benefits to be taxed, or trigger higher Medicare (IRMAA) premiums.

If you're able, I'd double-up payments (or something more than you are paying now) on the truck which would make a sizable dent in that $2400 in interest.

I’m just a dude and this aint advice. I would leave the investment out of this. I would investigate lower interest rate for the truck. You can refinance a vehicle. I did it once on a paid off vehicle when the interest rate was low. You are at 5.74% and my credit union is 4.74%. Of course this may extend the number of payments. As we know, you pay more principal at the end of a loan than the beginning. Other than that, treat your lump sum investment as a bird in hand.

What type of IRA? Traditional or Roth?

3% sucks, especially after tax. I’d use the IRA to pay the loan off. Depending on your how close you are to the next tax bracket, I would split it up over 2 or more years instead of pushing yourself into the next bracket. For example, if you are $10k from the next tax bracket for this year, I’d take $10k out of the IRA this year, pay down the truck loan, and then do the same next year.

At 75, you or someone else is going to pay the tax on that money when it’s withdrawn at some point regardless which brings me back to 3% sucks. With inflation and 3% you are losing money every year.

It depends on your current tax bracket versus what your future tax bracket might be. If you are in the lowest bracket now or your bracket is likely to remain the same, then I’d 100% do the above. If you are in a higher tax bracket now, but are likely to be in a lower one in the future then I’d wait until you are in a lower bracket.

@HRK

Thanks for that. It points out some factors I hadn't considered.

Much as I hate paying interest on a loan, it's apparent that paying extra on the principle as often as I can (which I've been doing) is a better plan.

As far as a re-fi, I've looked into that and the numbers don't work on that either without a significant reduction in the interest rate. I do not consider 1% "significant" especially in view of what a pain in the ass it is to refinance.

The current payment isn't causing me any pain, I just hate owing money.