10 Nov Should I take from inherited IRA to buy a vacation house?

Q. I want to buy a vacation house and I don’t have a lot of cash, but I do have an inherited IRA. I could take out money from there for the house but I know I will owe a lot in taxes. Is there any way to avoid having it count as income, what I take from the account?
— Buyer, maybe

A. The idea of buying a vacation house is attractive to lots of people, even today, when prices are high and interest rates aren’t exactly friendly.

We get why you’d want to pay cash instead of taking a mortgage in this climate.

But unfortunately, any funds that come out of a traditional IRA, whether your own or an inherited IRA is subject to income tax, said Joseph Sarnecki, a certified financial planner with U.S. Financial Services in Fairfield.

Also consider that taking a larger distribution from your IRA could put you into a higher marginal tax bracket because every dollar gets added to your current taxable income, he said.

“For example if you are married filing jointly and make $75,000 per year, you are in the 10% bracket,” he said. “If you take a $25,000 distribution, your income is now $100,000 and you are now in the 22% bracket.”

You have to ask yourself whether it’s smart to take that big hit now, or if you may want to wait to save more money so you don’t have to owe so much to Uncle Sam.

Plus, if you wait, you could see interest rates come down, so there could be a more attractive mortgage in the future.

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This story was originally published on Nov. 10, 2023.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.