Greetings! I trust that this will find you well and in good spirits.
Have you ever considered a home equity line of credit (HELOC) as a resource in retirement? For those of you that are not familiar with them, a home equity line of credit is simply an open line of credit with an established limit that a bank makes available to you for a small annual fee, which allows you to borrow money at any time with your home equity pledged as collateral. Don’t misunderstand; I’m not recommending that you take on new or additional debt. However a home equity line of credit can provide an easy access to liquidity at a low cost and may provide options financially that can benefit you under certain circumstances. Some scenarios where it may be better for you to use a HELOC and access the banks money rather than yours, are as follow.
Having access to a HELOC would allow access to ready cash. Which means you wouldn’t have to maintain as much of a short term / emergency account balance earning low yields and instead allow you to invest with a longer term objective and possible greater potential. Generally the longer we are willing to tie money up the greater the yield or growth potential. Furthermore you have to pay taxes on the low yield the bank pays on savings and short term cd’s.
Say you needed to get your hands on some cash quickly. Having access to cash with a HELOC might allow you to wait to sell a quality investment that’s down value, because of where it is in its market cycle. Accessing the HELOC rather than fire selling the investment, would allow you to wait until a better place in the investments cycle to sell it and use the proceeds to repay the HELOC.
Let’s say you are making withdrawals from a traditional IRA for income purposes. You examine your withdrawals for the year and realize that taking a withdrawal toward the end of the year will push you into a higher tax bracket and or a higher tier for Medicare premiums for the following two years. Rather than withdrawing more from the IRA, you could access the HELOC for income for year end. Then take the IRA withdrawal in the following year to pay off the HELOC and thereby pushing the income tax liability to the following year.
Using a Roth IRA for tax free year end income to avoid higher brackets, Medicare premiums etc. is a good idea also. However if the Roth is performing well, you might not want to sell it at that particular time; so having the HELOC to access would be beneficial.
If your children need or want to borrow money (don’t try to tell me that’s never happened to you). Using the HELOC and letting them pay you back the loan plus the net (after tax) cost of the HELOC, might be a better arrangement than loaning them your resources.
If you find yourself in a situation where you actually do need to borrow money, the HELOC may provide more favorable terms than the bank might loan for a car or a new roof etc. And interest on a HELOC like interest on a home mortgage, is tax deductible for some tax filers.
If having access to a HELOC makes sense it’s a good idea to obtain one before you retire, as some banks require you to have earned income to qualify for it.
If you have questions about this or anything else related to your retirement plan, don’t hesitate to contact me.
Jeff Christian CFP, CRPC