26 Apr Should I take from inherited IRA to buy a vacation home?

Q. I have $2.5 million in an inherited IRA and another $800,000 in my own IRA. I own my primary home worth $800,000 with a $300,000 mortgage. I also have about $50,000 in an emergency fund. No other debt. I’m working and I will for the next 10 years. I really want to buy a vacation home costing between $1 million and $1.2 million, but I think I would have to take out of the inherited IRA to make this work. How much could I take from the account for a down payment so I don’t have a massive mortgage on the vacation home? Or does it not make sense?
— Wanting

A. Taking a large sum from an inherited IRA to buy a vacation home is a big move.

There’s a lot to consider, including overall financial goals, tax implications and retirement planning.

First, ensure you clearly understand your retirement goals and needs, said Michael Green, a certified financial planner with GYL Financial Synergies in Parsippany.

He said you should consider consulting a financial advisor to assess whether withdrawing from your inherited IRA aligns with your long-term retirement plans.

Next, be sure you understand the tax implications of making this withdrawal, he said.

“Withdrawals from traditional IRAs, including inherited IRAs, are generally subject to income tax,” he said. “Be sure to calculate the potential tax consequences of withdrawing from the inherited IRA.”

You need to determine whether you can afford the mortgage payments on the vacation home without straining your budget, he said. Taking a large sum from the inherited IRA could potentially impact your retirement savings, so ensure you have a comfortable cash flow to cover ongoing expenses, he said.

“Generally speaking, allowing the funds in your inherited IRA to continue growing tax-deferred for more years is a significant benefit,” he said. “Explore other financing options for the vacation home, such as non-qualified savings, which would minimize withdrawals from your inherited IRA.”

You should assess the impact of withdrawing funds from the inherited IRA on your overall investment portfolio and asset allocation. Ensure you maintain a diversified investment strategy to mitigate risk, Green said.

Also consider any future expenses or unexpected events that may arise and impact your financial stability, he said. Maintaining an adequate emergency fund is essential to cover unforeseen costs, he said.

Finally, consider waiting.

“Depending on what year you inherited the IRA, the withdrawal rules will vary. If you are required to take minimum distributions over the next 10 years, you may have enough for a sizeable down payment in just two to three years of withdrawals,” he said. “This would also spread the tax burden over several years, allowing your inherited IRA to grow tax-deferred for more years.”

Ultimately, using funds from your inherited IRA for a vacation home down payment should be based on a comprehensive analysis of your financial situation, goals, and risk tolerance, Green said, so consider meeting with a financial advisor who can provide personalized guidance based on your individual circumstances.

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This story was originally published in April 2024.

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.