Raid a Roth for second home down payment or US HELOC?

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Kelly
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Raid a Roth for second home down payment or US HELOC?

Post by Kelly » Sun Mar 27, 2016 2:33 pm

I could use a second opinion on this. I need to come up with $100k for a down payment on a second house. I can either take this from my Roth (I've met the age and 5 year requirements) or use a home equity line of credit on the primary residence. That rate is 2.4% or 1.68% after tax assuming a 30% combined federal and state rate. My first take is that this is a "borrow to invest" question. I can guarantee myself 1.68% RoR by using the Roth or I may be able to make the spread between the loan rate and investment return.

The plan is to pay off the HELOC with the proceeds from the sale of the primary home in four years. So, I'm leaning toward the HELOC even though the Roth will lag its investment return by 1.68%. That will be the trade off for keeping the Roth.

Is there another way to look at this?

Many thanks for any comments!

Kelly

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grabiner
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Re: Raid a Roth for second home down payment or US HELOC?

Post by grabiner » Sun Mar 27, 2016 5:29 pm

I think it makes sense to use the HELOC because you keep the tax deferral in the Roth.

You are barely losing anything while waiting. If you keep the Roth money in a four-year CD, it has no risk, and bankrate.com says that you can earn 1.90% on a four-year CD in an IRA. This would actually come out ahead of the HELOC return if rates don't rise, and not far behind if they do rise. (You don't need to use a four-year CD, but this is the closest comparison.)

But this is a "borrow to invest" question; if you do take out the HELOC, count the loan as a negative bond in your asset allocation.
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acejacksingh
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Re: Raid a Roth for second home down payment or US HELOC?

Post by acejacksingh » Sun Mar 27, 2016 7:31 pm

I don't think it ever makes sense to raid retirement accounts unless it is one of those rare extreme emergencies...

Best of luck,
AceJ

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grabiner
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Re: Raid a Roth for second home down payment or US HELOC?

Post by grabiner » Sun Mar 27, 2016 7:37 pm

acejacksingh wrote:I don't think it ever makes sense to raid retirement accounts unless it is one of those rare extreme emergencies...
"Raid" isn't really the right word here. Retirement accounts exist for the purpose of spending the money, and the OP has reached the age at which he can spend it. The question is whether it is better to spend from the retirement account now, or borrow the money. And given the situation, I suggest borrowing the money; it's better to have, say, $108K more in the Roth account four years from now, rather than $112K more in the taxable account.
Wiki David Grabiner

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dratkinson
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Re: Raid a Roth for second home down payment or US HELOC?

Post by dratkinson » Mon Mar 28, 2016 7:22 pm

You can take the money out of a Roth, but you can't put it back. You can, however, repay a ST HELOC loan.

What would your retired self say? "You intentionally gave up tax-free market return (7%+) on $100K... from then until forever... to avoid ST interest on a ST loan? What were you thinking?"

Of course your answer might change if you were now 60 vs 35.
d.r.a, not dr.a. | I'm a novice investor, you are forewarned.

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