Buying a Plane - Taxes, Financing, and other Complications

[WDD]

How to buy a plane with cash and yet avoid taxes/AMT, and other problems.

GOAL: Making plans to buy a plane in 2, maybe 3 years when/if I pull the trigger on early retirement.

SOURCE: I was planning to pay for the plane from a combination of a lump sum from a small retirement benefit I earned, sell off some company LTI stocks that will vest if retire, and the rest from a non roth IRA distribution. There is still enough in the IRA's so that my retirement years will still be fully funded. BUT all of these sources will be considered "taxable income".

TAXES: IF I pull that much which will be considered taxable income at once, I'll probably bounce into the AMT territory. In 2 1/2 years I'll be 63, and that would set a high income level which will affect Medicare costs (they look at your income from 2 years prior to determine your Medicare costs), etc.

TACTIC?: How do others deal with this? What about a HELOC loan that is automatically paid by small distributions made over 5 years? Pull the money from the IRA's now, take the tax hit?

 

[SoonerAviator]

Not a tax guy, but it may be better to just get a standard loan (as low as rates are), and buy it now while using the distributions to make payments. Of course you can always cash out enough for a major down payment if you like, but I'd definitely find a way to avoid triggering AMT/Medicare thresholds if possible. HELOC is okay, but if you aren't going to have enough deductions to get above standard, I'd avoid tying anything to your mortgage.

 

[donjohnston]

I did a traditional loan on my first plane. But switched to a HELOC after a year because interest rates were so low.

 

[Clip4]

If you have a 401k plan with a loan provision, you might be able to borrow the funds from yourself and repay with interest. The cap by law is 50% / $50,000. You cannot borrow from an IRA.

 

[wayne]

The more income you pull out the more it gets taxed; unless it is something like a Roth-IRA / Roth-401k that is pre-taxed. Worse, the more you pull out the higher the tax rate goes on the margin dollars; i.e. if you hit the max tax rate not all of the dollars are taxed at the max, just those over the threshold.

So, it could make sense to have a loan on it so you can pull out fewer dollars each year and keep your taxes lower.

I'd leave any Roth money out there longer. Let it grow more as it won't be taxed when you do pull it out.

 

[bflynn]

Will the IRA distribution incur a penalty? It so, it's almost certainly better to finance.

 

[WDD]

Good points - appreciate the good thinking.

• No IRA early distribution penalty as I'm over that age limit.
• I only have a small 401k with my current employer of 3 years - all older 401ks I converted to traditional IRA's - so no loan options.
• No need to buy a plane now - with working still, I just wouldn't fly it that much - renting from club is cheaper.
• I might be facing just pulling smaller chunks this Dec 2021, Jan 2022, and then Jan 2023 and park it in a conservative Vanguard fund. I'll loose the return of a S&P 500 index fund, but avoid the stock market decline risk and avoid future interest rate risk, as well as paying interest on a loan.

 

[Pugs]

Good points - appreciate the good thinking.

• No IRA early distribution penalty as I'm over that age limit.
• I only have a small 401k with my current employer of 3 years - all older 401ks I converted to traditional IRA's - so no loan options.
• No need to buy a plane now - with working still, I just wouldn't fly it that much - renting from club is cheaper.
• I might be facing just pulling smaller chunks this Dec 2021, Jan 2022, and then Jan 2023 and park it in a conservative Vanguard fund. I'll loose the return of a S&P 500 index fund, but avoid the stock market decline risk and avoid future interest rate risk, as well as paying interest on a loan.

Similar situation except retiring this spring - likely buying a plane a year out. Unless rates go up dramatically it's well worth playing the game by both having a mortgage as well as a plane loan if they are both small enough to keep our marginal tax rate especially if you can get it below the 22% ceiling of $80,251 if married. That 10% tax savings can be a significant offset!

The trick is to have money to pay it all off without a lifestyle impact if you had to.

 

[Hang 4]

IRA withdrawals are taxed as ordinary income. Depending on your tax bracket, that can be a hefty hit. Also, you are giving up tax free appreciation on what you take out. You could pay a ton of interest with what you save in taxes and still end up ahead. I'd suggest if you are digging into an IRA or other retirement savings, you're not really paying cash anyways. Not sure what conventional airplane financing is these days, but might be better off just getting a loan that uses the aircraft itself as security.