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Retirement Planning: How to Travel Using Your IRA Funds

retirement planning

  • How to strategically use your IRA Funds for Travel
  • How travel fits into your retirement planning with IRA funds

If you’ve spent years “paying yourself first” and growing your funds through a taxable investment account, you might be ready to reap the rewards of your hard work.  Many retirees use an IRA as their “fun” account and start withdrawing to fund travel and leisure.

This can be a great financial plan to help you enjoy your golden years, but as with anything financial, there is a strategy to follow to ensure you’re getting the most bang for your buck

Look for Penalties

We know it’s rude to ask, but how old are you?

Even though you can take your money out of an IRA whenever you’d like, your age will play a role in the penalties you might face. If you’re younger than 59 ½, the IRS will charge a 10 percent tax penalty. The only exceptions to that rule are if you’re facing a medical issue or job loss. After you’ve reached 59 ½, and if you’ve had your account for more than five years, you should be able to avoid restrictions to when you withdraw your funds.

If an IRA is a part of your retirement planning, consider your age when you make your first withdrawal to understand the risk of penalties.

Determine How to Use Your RMDs

While you may face penalties for taking your money out too early, there may also be implications if you’re taking your money out too late. By the time you reach 70 ½, you’ll be forced to take required minimum distributions (RMD) which will vary in total based on your account balance. In fact, failure to withdraw an RMD results in a tax penalty equal to 50 percent of the total RMD amount.

RMDs can be a great source of funds for your travel. But if you’re using them just because you aren’t sure what else to put your RMDs toward, see if reinvesting makes more sense, and paying for your travel from another fund is more strategic.

Get with a personal financial advisor to help flesh out the best strategy for you based on your holistic financial position.

Consider Tax Implications

Early withdrawal fees aren’t the only way the IRS can get you. What type of IRA do you have?

If you have a Roth IRA:

  • And, you withdraw money before age 59½ in addition to the 10 percent penalty we mentioned above, you will also be on the hook to pay ordinary income taxes on any investment earnings you withdraw.
  • If you’re above age 59 ½, and you’ve had your Roth IRA for more than five years, you can avoid taxes from investment earnings.  

If you have a Traditional IRA:

  • Regardless of your age, your withdrawal will be taxed at your current tax rate.
  • Unlike a Roth IRA, Traditional IRAs don’t benefit from capital gains tax treatment, which means, your withdrawal will be taxed like regular income.  

It’s always best to consult with a professional when tax implications arise. They can help you determine a realistic timeline for your travel, or alternate assets to finance your trip if you can’t wait to set sail.

Determine How You’ll Sell

The contributions you make to your IRA can be used it to purchase investments like individual stocks, mutual funds, and bonds. This means, when you decide to sell, you will need to decide if you want to cash out on your entire IRA, or just a portion of your assets.

It can be tricky to know which is the best option for you based on your personal finance portfolio and market trends, use a trusted advisor to help you navigate the waters.

If you’re unsure how to sell your IRA, work with a professional to help you determine what benefits you the most.  

Double Up on Strategy

From contacting your IRA custodian until the time you receive a check for your withdrawal, the entire process of cashing out on the account can take a week or longer. If you're already in the stage of booking accommodations or reserving tours, but don’t already have your check in hand, consider using a rewards or travel credit card to earn points.

Additionally, you can use these cards while you travel to eliminate transaction fees and build rewards points, then quickly pay your balance off once you’ve received your IRA check.

Of course, this strategy only makes sense if you have a proven track record of credit card responsibility and a credit card that allows you to build rewards.   

You’ve worked your entire life, it’s time to treat yourself. Finally, take that road trip you’ve always planned, go see the Eiffel Tower or the Northern Lights — the options are endless.

Ready to take the next step?

Let’s talk!

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