use retirement savings or home equity line of credit

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use retirement savings or home equity line of credit

Post by beatle2020 »

A quick thank you for all the great advise given in this forum.
My question- first my wife and I are retired. I will be 67 in November, she is 62. We have not taken any retirement distributions yet. Have lived off social security and pensions, have no debt. We live comfortably off our monthly income. We are at the point where we would like to do some things around the house and also do some traveling. Need more money for that. My first thought was to take money from our IRA's, all at Vanguard, me with Target 2015, my wife with Target 2020( some of each in a regular IRA and some a Roth). We have no mortgage but have a $50,000 home equity line of credit with presently 3.25% a.p.r.(We have not used this account yet and have a zero balance.)

If we take IRA distributions we obviously will owe income taxes, probably 15 to 20%. I could wait until I am 70.5 to take distributions. Basically 3 1/2 years.

Would it make sense to use the equity line of credit for our home improvements and travel, paying 3.25% now, or take it from retirement and pay 15 to 20%. Seems like the line of credit is better. We have the ability to pay back, on a monthly basis, over time, for what we would borrow. We anticipate wanting to use between $15,000 to $20,000 per year and have approximately $600,000 in retirement savings.

Sorry for the long post but you folks have been very helpful in the past. This seems viable to me.
Your thoughts?
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Post by daveatca »

HELOC - you will force yourself to pay it back
distribution - you won't

The HELOC will encourage you to "get a job" which will give you more money in the long run and be better for your health.
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Re: use retirement savings or home equity line of credit

Post by CAsage »

You did not specify who owns the IRA, is it in your name or your wife? Also, it would be helpful to know your taxable income. But I will make an assumption that it's in your name, and your taxable adjusted gross income is well within the 15% bracket.

In that case, I would suggest you pull out what you need this year to fix the house and travel, up to the maximum point brushing the 25% federal tax bracket. When you turn 70.5, you will be REQUIRED to pull out some money annually, and the first years' RMD on a balance of $600K would be $21,898. That may push you into the 25% tax bracket! Joy. That means all your 'last dollars' will be taxed at 25%, not 15%.

If you don't need the money now, convert as much as you can to a Roth IRA before you turn 70. I would suggest you study up on tax brackets and Roth conversions, and do a sample tax return with those numbers, to see how it looks. You need to look ahead a few years (just estimates).

Also, comparing the 3.25% HELOC rate to the tax bracket is like apples to oranges. What you should compare it to is what you are likely or guaranteed to earn in your IRA = might be more, might be less, but debt is not a good thing in retirement. Pay for your fun with your savings (aka IRA) as you go. Just my opinion. Note you can't spend any of the money without paying taxes on it.
Salvia Clevelandii "Winifred Gilman" my favorite. YMMV; not a professional advisor.
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