Early IRA Withdrawal

Not really enough info... how much would the withdrawal be and how much is the projected interest with and without extra payments?

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This year our AGI will be in the 24% bracket with room to spare

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What does room to spare mean?

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Next year and into the future I expect to be in the 32+% tax bracket

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If your income is about to pop, why don't you have the money to pay down the debt faster without stealing from future negatiger?

Ok, then I disagree with the logic.

Random Internet Guy - 1
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I'm ballparking the interest rate at 5%.

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I think your interest will be higher, maybe a teaser rate at this level, dunno.

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I could liquidate securities to pay cash but the market is beat up and time is on my side.

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By your own logic, you're going to take a hit on already taking a hit. I'd aggressively pay it down and roll out.

So you will pay 34% plus state taxes.

I’m Not sure what 24 vs 32 marg rate has to do with this… unless you have committed to doing this and are just trying to decide what year to do it in.

Do you itemize? Is the 5% a potential tax deduction, lowering the true cost?

Are you factoring the foregone future tax deferred growth?

If you are worried about cash flow, can you cut back your current 401k contributions to the point of just enough to get the match?

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Ok, then I disagree with the logic.

Random Internet Guy - 1
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Don't understand this part. If you want to use numbers, let's say the withdrawal is $100k. If my project is $500k, at 5% interest and a pay-down goal of 7 years (84 months), that's $94K in total interest with a monthly payment of about $7k. If I take the withdrawal, that's 66k after taxes and penalties, so now the loan amount would be $434K, leading to $68K of total interest using same $7k/month payment which shortens the length of the loan to 72 months. So it's $26k in aggregate interest savings. You might say I'm spending $34k to save $26k, but that's too pessimistic because you will pay income taxes on the $100k at some point - and it's impossible to predict what rates may look like in 25+ years. At current tax rates it would be around 12% if that $100k was my only income in a retirement year. So then it's $22k on the margin to save $26k.

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your interest will be higher,

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I think you're probably right. Working on scoping this out now. But the "benefit" described above only improves with an increasing rate.

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By your own logic, you're going to take a hit on already taking a hit

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I assume you mean because I'm selling assets in the IRA, in a down market, and taking a penalty. Fair point. But I'm locked out of that money until I'm 60, at which point it still carries a tax liability. It feels like there is some value to moving a portion of that into the after tax bucket. Note that when the Trump tax cuts expire the current 24% bracket likely jumps back to 28% and the 12% bracket back to 15%.

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I am considering early withdrawal from IRA in an amount that would push our AGI to the upper end of the 24% bracket and accepting the penalty.

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If you truly think that "tax arbitage" is the correct play then what you are proposing is not the best route. I'm not saying you are right or wrong either way about the tax arbitage. Imo, your analysis should be comparing the 24% tax now to the tax rate when you'll pull the money out for retirement spending.

Basically impossible to determine unless you have concrete retirement withdrawl plans already. This is doubtful given your age. Also it should be your effective tax rate to look at not the bracket.

Anyway imo the correct tax arbtiage play would not be an early IRA withdrawl which incurs a penalty. You should instead be doing a IRA to Roth IRA conversion for the same amount. This way you avoid the penalty while paying the lower tax rate on the conversion amount. Plus you are increasing your Roth assets that are tax free going forward.

When you do a Roth conversion, the principal amount converted can be withdrawn in 5 years penalty free. So this is a way to access IRA retirement assets early. This is a common strategy for people who retire early before 59.5.

If you really want to access IRA assets before 59.5 then 72t withdrawls is another option. However once started it can't be stopped w/o signfinicant penalties. Also, there are penalties if you don't follow and withdraw the correct amount each year which isn't a simple/fixed amount.
https://www.investopedia.com/terms/r/rule72t.asp

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Mathematically, there is no difference in taxing something in year one and then letting it grow versus letting it grow and then taxing it in the final year,

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The whole point of “tax deferred” investing is “compounding.” It is a struggle to compound IF you are withdrawing with 24 years to go.

Is this project beyond your means? What is the purpose of the remodel?

It’s your money.

The best investments I have had have been the ones I’ve held the longest.

I think this is a better idea. Thank you.

To your point, I'm likely muddying the waters by tying these two things together. I'm looking at year end tax matters and the thought of the "tax arbitrage" you describe came to mind. Also top of mind is the home project we are likely to take on next year and the best way to finance that. But one does not depend on the other.

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Your securities backed loan is a good option to keep assets invested.and differ capital gains taxes.

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Exactly. I think some are missing that the point of the debt isn't to spend money I don't have but to be smart about market timing ("average out" just like some would "average in") and tax consequences for assets/money I DO have.

Thanks for the data points - helpful post.

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Also top of mind is the home project we are likely to take on next year and the best way to finance that.

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One option is to use your Roth IRA. This assumes the contributions you've made over the years can cover it.

Normally I'd never consider this and only withdraw Roth contributions for a true emergency before retirement.

However if you do the Roth conversion as previouly discussed, then I assume the net change in Roth principal would be a wash.

If that's the case, then I don't see a problem with this option. This would be no different than if you had the option to withdraw from the IRA penalty free.

The con of doing this would be that you no longer have those Roth contributions available for penalty free withdrawl in an emergency. Though in 5 years, the conversion amount would be available.