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Hi,

I'm 50, and have a traditional IRA valued at $210k. The problem is, I'm 50, and I've always been working towards my own boat and sailing. I'd like to invest this in a live-aboard (and this will pay for most of the boat, assuming I lose 70k) and when I leave my job 5-9 years (for which will pay the remainder and then some) be set and do this as long as I am able to. I really don't know how much I'll lose, but I'm sure close to 50% of that is possible.

I know cashing out a 401 is not a good thing financially, but I see it as a trade-off. I'm going to lose to the taxes anyways, and I'm aware of the penalties and loss of growth, but at the same time, once these doors close, I won't be able to make this decision too much longer. There comes a time that if your going to do it, you've got to pull the trigger.

So I'm curious to know thoughts and recommendations.
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Not enough information. Is the IRA your only investment?
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What resources do your have for retirement? Social Security? Pension? Inheritance? Do you also have a 401K?

When you retire, what do you plan to live on?

Penalties will cost you 10% plus you will pay income taxes fed, state, local. Depends on your tax bracket but total of 40 to 50% to the govt in taxes is not uncommon.
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No. of Recommendations: 9
I'm 50, and have a traditional IRA valued at $210k. The problem is, I'm 50, and I've always been working towards my own boat and sailing. I'd like to invest this in a live-aboard (and this will pay for most of the boat, assuming I lose 70k)

HAHAHA - losing only $70k when cashing in a $210k IRA and you have other income besides? You are dreaming....

You don't say if you're married or single, but from the tenor of your post and not mentioning a spouse, it sounds like you're single. That means that if you have just $50k in other income, your total income will be $260k. Take off the $12k standard deduction, and that leaves $248k in taxable income. As a single person, that puts you in the 35% bracket and will be about $62.5k in taxes. Add to that the $21k in penalties for withdrawing before you're 59 1/2, and that's $83.5k in taxes - or $13.5k more than you hoped you would lose. And if you have state income taxes and penalties, there will be additional taxes. And, as you also point out - that doesn't account for the growth that you will lose.

when I leave my job 5-9 years (for which will pay the remainder and then some) be set and do this as long as I am able to.

'as long as I am able to'? That doesn't sound very promising. Considering that 'most of the boat' will cost you $210k plus whatever else you will be paying off when you leave your job, and used boats generally depreciate at a pretty good clip, you better hope you can stay on it for the rest of your life.

I really don't know how much I'll lose, but I'm sure close to 50% of that is possible.

The fact that you have no idea how much you'll lose to taxes, much less the growth shows me that this is just a dream, not a real plan.

So I'm curious to know thoughts and recommendations.

All in all, it sounds like you don't plan well, and are looking for validation of an unplanned dream. No validation from me.

AJ
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In looking back at some of your old posts, you indicated you were a Highly Compensated employee in 2008, which, at that time, was $105k. Assuming that you are still making at least that much and are single, you are actually already in the 24% bracket, and taking the 401(k) withdrawal all at once would push you completely through the 32% bracket and into the 35% bracket, so the numbers are even worse:

Taxes on $93k income (after taking the $12k standard deduction): $16,610
Taxes on $210k withdrawal:
$64,500 @ 24%: $15,480
$42,500 @ 32%: $13,600
$103,000 @ 35%: $36,500
Penalties @ 10% on $210,000: $21,000

Federal taxes and penalties on 401(k) withdrawal: $86,850

And that doesn't include any state taxes/penalties, which could be another $10k - $30k, if your state has an income tax and charges a penalty for early withdrawal.

AJ
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I'm single. My 401k is my only investment. I do have a home worth about $250k, but I still have $170k to pay. For retirement, I'll have social security, no pension. I plan to live on the boat for retirement.
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I live in Dallas, making $130k. No state income. Thanks for clarifying that. I had a feeling that's what it would amount to.
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I live in Dallas, making $130k. No state income.

That makes it a little worse. Even though you've been able to itemize in the past, your property taxes (around $5k) and mortgage interest (maybe $6k - depending on your interest rate) probably don't exceed the threshold of $12k for the standard deduction.

Taxes on $118k in regular income: $25,490

Taxes on the withdrawal:
$27,500 @ 24%: $6,600
$42,500 @ 32%: $13,600
$140,000 @ 35%: $49,000

Penalties @ 10% on $210,000: $21,000

Total taxes and penalties on the withdrawal: $90,200

Just to be sure you understand what you will be paying in total taxes on your income for the year that you do this...

Adding in the income taxes on your regular income: $115,690 for income taxes

SS & Medicare tax on $130k:
$128,700 (SS earnings limit) @ 6.2% = $7,979
$130,000 @ 1.45% (Medicare) = $1,885

Total income based taxes: $125,554

That's almost your entire earnings from your job for the year going to taxes on your income. Do you really want to do that?

I'm single. My 401k is my only investment. I do have a home worth about $250k, but I still have $170k to pay. For retirement, I'll have social security, no pension. I plan to live on the boat for retirement.

If you really want to get a boat that can be lived on (i.e. has a galley, a head and berths), you should look at getting a mortgage from a lender on it, rather than cashing out a retirement plan. As a 'live on' boat, it can be considered either a second home, or a vacation home, and the interest on the loan, as well as any property taxes, would be deductible. There are caveats for deductibility as a vacation home - you can't use it for your own use, or let friends/family use it at less than the rental market rate for more than 14 days in a calendar year. However, as a vacation home, if you rent it out, that would give you some income to help pay for the mortgage and maintenance. You may have to have a different type of insurance if you are renting out the boat, so be sure to let your insurance agent know what you are planning on doing.

If you go this route, you should have ALL OTHER DEBT except your first mortgage paid off completely. That would include, but not be limited to: NO car loans, credit cards, personal loans, HELOCs, student loans, 401(k) loans, etc. In addition, you should have an emergency fund of at least 6 months of expenses (mortgages, property taxes, insurance, food, utilities, etc.), plus the down payment for the boat, saved in a liquid account before you try to get financing. I would strongly suggest that you finance the boat for no more than 10 years, so you can be sure to have it paid off before you want to retire.

At your income level, you should still be able to max out your 401(k), as well as fund a Roth IRA, in addition to paying for your house, your boat and other living expenses, without going into debt. If you can't do all that, you need to take a serious look at your spending.

If you can't get into a financial position to have all your debt paid off, plus the liquid savings and maxing out retirement accounts while still borrowing to purchase a boat, then you really can't afford to buy a boat now. You would be better off to work on paying off all debt, including your mortgage, and when you sell your retire and sell your house, buy the boat with some of the cash from your house.

AJ
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I'm 50, and have a traditional IRA valued at $210k. The problem is, I'm 50, and I've always been working towards my own boat and sailing. I'd like to invest this in a live-aboard (and this will pay for most of the boat, assuming I lose 70k)

Besides making an assumption instead of real calculation of the taxes and penalties, you may be forgetting the other ongoing costs. Yes, homes have property taxes and maintenance. But, your live-on boat may have a lot of that as well, plus harbor fees, dock rental, fuel, etc.

The one number I recall for something like that is paying for the marina space at $1,050 a month, and a $250 "live aboard" fee which covers utilities, parking, and a mailbox. Pumping the sewage tank monthly is extra, as is the twice-yearly barnacle scraping (and whatever else divers do to the submerged portion). Do you have enough junk that you'd have to rent a storage facility?

You'll want to get all those costs calculated plus run the real numbers on your penalties and interest. Also figure out where you might be at age 62 or 67 if you gut your retirement savings at age 50. I always invested aggressively, thinking that if a stock market downturn came right when I wanted to retire, I could just keep working a few years...my company laying off 80% of its US employees, and a few friends in similar situations, made me see the error of that assumption. If you ever had to relocate, would you insist on a job at a company near a dock, or would you sell the boat? I'm *guessing* that the "round trip" on a boat is a money loss, whereas on a house it usually isn't.

The bottom line is that living on a boat is a lifestyle choice. Some people like having a classic car for summer weekends, or living in a much more extravagant house and neighborhood than their family size and income usually indicate. If that trips your trigger, make sure you have a handle on all the likely lifetime costs.
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The one number I recall for something like that is paying for the marina space at $1,050 a month, and a $250 "live aboard" fee which covers utilities, parking, and a mailbox. Pumping the sewage tank monthly is extra, as is the twice-yearly barnacle scraping (and whatever else divers do to the submerged portion). Do you have enough junk that you'd have to rent a storage facility?

It's worse you might think. It's certainly regional, but some marinas in Fort Lauderdale charge $1 to $2 per ft PER DAY for dockage, and it goes up/down seasonally. If you keep a boat that size in the water, you're also looking at having the boat hauled out and the bottom painted every couple of years. Plus regularly replacing everything that rots in the water. Doubly so if it's saltwater. Remember, everything on a boat - engines, generators, AC systems - is water cooled.

A good rule of thumb is 10% of the cost of the boat annually. Could be more, especially if it's a large motorboat and you take it anywhere. Many live aboard sized boats can burn nearly a gallon a mile at cruising speed. And marine fuel is easily $4/gal, even when gas stations on land are cheap.

I shopped mid-30ft cruisers a few years back. The boats were actually pretty reasonably priced. Owning one wasn't. Probably why used prices were so good. I've happily remained boat free...
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