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Here's a interesting point of view/question. With interest rates near 10% for loans these days - used car loans at 9.06% for someone with excellent credit - are we at a point where it makes more sense to take the 10% IRA withdraw penalty to finance a loan vs 9% interest on a loan? If you have a good nest egg and taking the withdraw won't hurt long term goals, in my eyes right now it's lower risk to just use money you have versus incur debt at crazy high rates.

Thoughts?

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  • You're asking for opinions, and discussion , which really isn't what Stack Exchange is set up for. But this could be rephrased as "what's wrong with this analysis", so I'm not voting to close it.
    – keshlam
    Nov 5 at 16:39

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Biggest concern: There isn't just the penalty. You're also giving up tax-advantaged growth of that money in the IRA, which depending on your age may be a large additional cost.

Some retirement plans let you borrow money out of them. That avoids the penalty, and in theory lets you pay interest to yourself -- but losing time in the tax-advantaged growth mode is still a high enough cost that most folks will tell you to consider that only if it's impossible to get a reasonable loan in other ways.

Run all the numbers to determine what your real cost will be.

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If you have a good nest egg and taking the withdraw won't hurt long term goals, in my eyes right now it's lower risk to just use money you have versus incur debt at crazy high rates.

You are pulling out of your IRA money that you set aside in a previous years for your future retirement. When you pull those funds out of the IRA you can't put those funds back in. That opportunity is lost forever.

Just because you get a loan for x months you can pay it off quicker by aggressively making extra payments. Avoid a auto loan with a prepayment penalty. These types of penalties are very rare. Paying it off quickly saves you interest.

Also remember in addition to the 10% penalty, you will also pay income taxes on the money you withdraw. That has to be factored in when you determine the additional funds you will have to find with to turn the IRA funds into a car. You may have to take an even larger withdraw to afford the car.

For example:

  • price of car: $30,000
  • tax rate: 22%
  • penalty: 10%
  • total rate: 32%
  • amount required to have a net of the car price: $30,000/(1-0.32)=$44,118

The $30,000 loan over 5 years at 9% is $622.75 per month, and the total interest you will pay over the 60 months is $7.365.04.

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