65-Year-Old Considers $30K Home Upgrade: Should Roth IRA Fund It?

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Should You Use Your Roth IRA for a $30K Home Improvement Project?

Deciding whether to use your Roth IRA for a home improvement project can be a challenging decision. It’s essential to consider both the short-term tax implications and the long-term financial planning impact of withdrawing from each account and when. In this article, we’ll explore the pros and cons of using your Roth IRA for a $30K home improvement project and provide some alternative options to consider.

Examine Your Tax Situation

When deciding whether to withdraw funds from your Roth IRA or a nonqualified brokerage account, examining your tax situation is crucial. If you are over 59 ½ years old, there would be no immediate tax implications if you withdraw funds from your Roth IRA. However, you may face a 15% or 20% capital gains tax rate on withdrawals from your taxable brokerage account, depending on your income and tax filing status.

It’s essential to consider the long-term tax implications of your withdrawal sequence and evaluate each account’s purpose in your overall financial plan. With taxes, there is no one-size-fits-all recommendation, and working with a professional will increase your likelihood of optimal results.

Consider a Taxable Withdrawal

It might make more sense to use your brokerage account for the withdrawal while you have income to support the current tax bill. You should review the individual holdings within the account and consider tax-loss harvesting opportunities or gifting appreciated securities to a charity to offset the tax burden of liquidating a portion of your taxable account for the home project.

The Purpose of a Roth IRA

Roth IRAs are designed to provide tax-free income in retirement, not a tax-free source of general-purpose funds. Tapping into a Roth IRA before retirement can reduce your ability to capitalize on the power of a Roth IRA, as your savings will be more valuable in retirement if you allow the funds to continue compounding tax-free.

Bottom Line

On the surface, it may seem ideal to withdraw money from qualified accounts to minimize your current tax bill. However, you should consider the long-term tax implications of your withdrawal sequence and evaluate each account’s purpose in your overall financial plan. With taxes, there is no one-size-fits-all recommendation, and working with a professional will increase your likelihood of optimal results. Approaching a home improvement project – or any significant expense – in this manner will yield results that align best with your financial goals.

Tips for Finding a Financial Advisor

  • Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you.
  • Consider a few advisors before settling on one. It’s important to make sure you find someone you trust to manage your money. As you consider your options, these are the questions you should ask an advisor to ensure you make the right choice.

Original Story at finance.yahoo.com – 2023-05-23 19:29:28
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