If you’re approaching retirement, you may be taking a closer look at your savings and investment accounts. Perhaps you’re pondering the idea of tapping into your home equity — taking out a home equity loan or opening a home equity line of credit (HELOC) — to bolster your retirement accounts while you’re still working. But is that a good idea?
Here are some of the risks and rewards of this leveraging strategy.
- Advantages. Borrowing against the equity in your home means you’ll be paying mortgage interest, an expense that’s deductible if you itemize on your income tax return.
Another potential tax advantage: If you contribute the proceeds from your home equity loan to a traditional 401(k) plan or IRA, you have the opportunity to reduce your taxable income. In addition, pumping up your retirement fund offers the potential for greater growth over time.
For 2015, individual tax-deferred contributions to a 401(k) plan are limited to $18,000 per year, with an additional $6,000 allowed if you’re over age 50. Small business owners who contribute to a SEP IRA enjoy even higher contribution limits.
- Disadvantages. If you or your spouse is laid off or lose other sources of income, payments on your home equity loan won’t go away. Depending on the terms of your company’s retirement plan, getting money out of your account may not be easy. If you’re under age 59½, you’ll likely incur penalties for early withdrawal.
What if the value of your home drops below the outstanding balance on your loan? You may find the house difficult to sell, and if you can’t sell, paying off your home equity loan can become problematic.
Finally, by using this strategy, you’re hoping to generate a greater return on the borrowed money than the cost of borrowing that money. But there’s no guarantee your retirement account will generate a healthy return. As recent events have shown, the stock market is volatile, especially over the short term.
You do have other options. For example, you could tighten your household budget and use the money you save to increase retirement account contributions. Benefits include no interest, no penalties, and no long-term obligations.If you would like to discuss your retirement needs further, give us a call.
