Dear Dr. Don,
I have an individual retirement account with the bank. With the economy the way it is, it has taken every cent that I have to pay the bills while raising two kids on my own. I work in construction, and everyone knows how that work has fallen off in this economy. My car has broken down and I need to buy another one, but I don’t have the income to pay the current bills plus a car payment. So what do I have to do and how much will it cost me to make an early IRA withdrawal to buy a car?

— Dean Depletes

Dear Dean,
I’m going to trust you when you say that money’s tight and that there’s no way to make the payments on a new car without raiding the retirement account.

My advice is that you look for a used car or truck that can meet your needs and not buy new. You want reliable, but you don’t want to pay up for new. You also want to preserve, if possible, some of your retirement savings and not empty the account to buy that vehicle. Retirement is still on the horizon and you still need to plan for it, even if transportation is your first priority today.

Getting the money out is the easy part. You didn’t say how it is invested with the bank, but if you have it in an IRA CD, the bank could impose an early withdrawal penalty on top of any tax impact.

Since you didn’t say you have the money invested in a Roth IRA, I will assume it’s in a traditional IRA. A traditional IRA can be funded with either pretax or after-tax dollars.

If funded with pretax dollars, you’ll owe income tax on the distribution out of the account. The distribution will be taxed at your marginal federal income tax rate. You’ll also owe any state and local income taxes due on the distribution.

If you put in at least some after-tax dollars, you won’t have to pay income tax on the part of the account funded with after-tax dollars.

On top of the income tax, you’ll owe a 10 percent penalty tax for money distributed out of the account prior to age 59 ½, unless you qualify for one of the exceptions to the penalty tax. The exceptions are listed in Internal Revenue Service Publication 590, Individual Retirement Arrangements, and include if you are disabled or if you are using the money to buy, build or rebuild a first home. Buying a car is not one of the exceptions to the IRA early withdrawal penalty tax.

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