Should a 66-year-old retiree with $1.9M in an IRA pay cash or finance a vacation home?

A 66-year-old retiree with $1.9 million in a traditional IRA is considering withdrawing $400,000 to pay cash for a vacation home. However, this could lead to a hefty tax bill and increase Medicare premiums. An alternative is to finance the home and withdraw enough each year to cover payments, keeping the IRA mostly intact.

A 66-year-old retiree with $1.9 million in a traditional IRA is considering withdrawing $400,000 to pay cash for a vacation home. While this option offers immediate liquidity, it could lead to significant tax implications and increased Medicare premiums. An alternative approach is to finance the home and withdraw enough each year to cover payments, keeping the IRA mostly intact.

Tax Implications

According to the IRS, withdrawals from a traditional IRA before the age of 59½ are subject to a 10% early withdrawal penalty, in addition to income tax [1]. If the retiree withdraws $400,000 from their IRA, they could face a substantial tax bill. For instance, if the retiree's income for 2025 is $15,750, they would not owe any federal income tax on the withdrawal [1]. However, if the retiree's income exceeds this threshold, they would be subject to income tax on the withdrawal amount.

Medicare Premiums

Medicare premiums are based on the retiree's income. For 2025, the standard Medicare Part B premium starts at $185 per month for individuals with incomes below $91,000 and increases to $578.30 for those with incomes above $91,000 [3]. Withdrawing $400,000 from the IRA could push the retiree's income into a higher tax bracket, potentially increasing their Medicare premiums.

Financing the Home

An alternative strategy is to finance the home and withdraw enough each year from the IRA to cover the mortgage payments. This approach allows the retiree to maintain a larger portion of their IRA, potentially reducing the overall tax burden and preserving retirement income. Additionally, financing the home could provide tax benefits, such as deductible mortgage interest payments.

Conclusion

The decision to withdraw from a traditional IRA to pay for a vacation home should consider the potential tax implications and increased Medicare premiums. Financing the home and withdrawing enough each year to cover payments may be a more tax-efficient strategy. It is essential to consult with a financial advisor to evaluate the best course of action based on the retiree's unique financial situation.

References

[1] https://www.reddit.com/r/tax/comments/1m54jc4/do_i_have_to_pay_taxes_if_i_withdraw_15000_from/
[2] https://www.benzinga.com/analyst-stock-ratings/analyst-color/25/07/46401541/pfizer-faces-1-billion-ira-reform-hit-analysts-2025-outlook-flat
[3] https://www.schwab.com/learn/story/demystifying-medicare-retirement