Retirement money to home equity loan?

**jIM_Ohio** · 10-08-2008, 09:24 AM

I think the logic being considered is short sighted.

At this time I would send in minimum payments to the HELOC and up 401k contributions until it hurt.

Then once market rebounds, scale 401k contribtions back and increase the debt repayments.

Create a timeline.

start at "now" and end the timeline at retirement.
How long is the timeline?
Make sure the HELOC is paid before the end of the timeline.
Make sure the 401k has enough at end of timeline
I would not stop doing one to fully do the other at any point
I would not cash out the 401k at bottom (now) because that will extend the timeline, not reduce it.

Keep a long term perspective of all financial matters.
Send 15% of gross pay to retirement accounts
send 5% of gross pay to other financial matters (like paying down HELOC)
at this point I would shift as much of the 5% towards investments, provided minimum HELOC payment on the timeline is being met.

**creditcardfree** · 10-08-2008, 09:30 AM

Thanks for the opinion Jim.

Just to clarify...I would not do anything with money that is already in our Roth IRA's and college funds. I was considering current contributions.

We are currently at 15% gross going to retirement.

**jIM_Ohio** · 10-08-2008, 09:47 AM

I wouldn't reduce contributions or borrow from 401k right now- right now you want to accumulate as many shares as possible. Consider contributing higher than 15% for short term. Once you see a positive return over a 12 month period, I would consider going back to 15% and paying down debt.

**creditcardfree** · 10-08-2008, 10:02 AM

Thanks Jim for backing up what I really already knew. I just wrote to someone else the other day and stated, "It's ALL on sale."

So, the contributions will continue as planned.

In 12 months, we could be moving thanks to the US Army, so I would like to get rid of the HEL...and have that additional equity for the new home. I just keep plugging away and see how close we can get to paying it off.

**jIM_Ohio** · 10-08-2008, 10:59 AM

Originally posted by creditcardfree View Post

Thanks Jim for backing up what I really already knew. I just wrote to someone else the other day and stated, "It's ALL on sale."

So, the contributions will continue as planned.

In 12 months, we could be moving thanks to the US Army, so I would like to get rid of the HEL...and have that additional equity for the new home. I just keep plugging away and see how close we can get to paying it off.

What is the HELOC balance and how much extra are you sending?

If the payoff is short term (meaing that 5% I mentioned would pay off in less than 12 months) I would error on side of payoff. But if HELOC is there in 3 years still, I would divert money as suggested before.

**creditcardfree** · 10-08-2008, 11:59 AM

Balance is $14,835. Regular pmt is $118. Extra approximately $400/mo. So, right now we are sending an additional $518 to this loan each month. That is 7.3% of our gross income. At the current rate, it will take us 32 months to pay it off.

TSP (401k), Roths and college contributions we are saving 20% of our gross income.

Anyone else...have thoughts & opinions?

**jIM_Ohio** · 10-08-2008, 12:16 PM

My thought is the $400 will gain you more profit over 32 months somewhere else, especially considering you are moving within 12 months.

I would do any of the following with the $400:
1) keep in cash for down payment in 12 months
2) invest inside 401ks (this will lower taxes considerably for 2008 and 2009)
3) invest the $400 in a taxable account into around 60% equities and 40% muni bonds (tax managed balanced fund).

I don't know your gross income or tax situation and do not know how much of a deduction your HELOC is getting you.

My big picture (3 year) scenario is this:
Within 3 years the market should be up around 20% from where it is now, you could invest the $4800/year and have about $17k in 3 years off an investment of $14400 (That is an 18% ROI-much better than HELOC rate). You would have HELOC paid down well below $14000 then, so there is significant profit not tied up in mortgage.

In addition if times get bad, you do not want the money tied up in your house (cash accounts will be better).

If you could pay the HELOC off in 12 months, that is about only time I could see in this situation, advising to tie the money up in house (because debt would be gone quickly).

I consider 32 months medium term and would be looking to maximize the return because opportunities like the present do not present themselves often.

**anonymous_saver** · 10-08-2008, 12:30 PM

Originally posted by creditcardfree View Post

I'm really a big believer in keeping one's retirement investments going. But I've been having thoughts...about getting our home equity loan paid off. In this economy, with mutual funds tanking, and our HEL charging us 7.5%, is it a better idea to pour this money into our home equity loan?

I would keep the current 4% going to DH's work retirement plan, but funnel our Roth IRA money to the HEL. Works out to about $860/mo. I could also stop the girls college money...$336/mo total. That would be almost an additional $1200.

HEL balance is $14,835. Regular payment is $118. Last month I was able to send an additional $400 in towards principal. How much extra I send in each month tends to be variable based on other needs that arise.

I completely realize that now is the time to buy for long term investments, so that is probably what is keeping me from seriously considering this as an option. I just don't like my HEL.

What's everyone else thoughts when I bring this up? I just need to hear opinions.

I would keep with your current retirement contributions, possibly even increase them like the other poster suggested.

However, I would consider stoping the college money for your girls. Maybe split it between paying off the HELOC and increase your retirement savings. Once you have all debts paid off (other than your mortgage), and have a solid emergency fund, then I would start the college savings again.

Looks like you are doing pretty good though, you should be proud of yourselves.

**creditcardfree** · 10-08-2008, 12:36 PM

Thanks, anonymous saver! Emergency fund is already in place.

Jim, I do like a few of your suggestions. I'll have to see what DH says. He would probably love for me to get us going in a taxable investment! We don't much alot in his TSP, because the investment options are so limited. There is only one of each type of fund. One small cap, one bond fund, ect.

I do like maxing out our roths, but as our income has gone up, I'm tempted to move to the traditional IRA's. I don't think I will change that until the next calendar year.

**jIM_Ohio** · 10-08-2008, 12:43 PM

Originally posted by creditcardfree View Post

I do like maxing out our roths, but as our income has gone up, I'm tempted to move to the traditional IRA's. I don't think I will change that until the next calendar year.

This becomes a tax decision more than an investment decision, IMO.

I would not give up the Roths if in 15% tax bracket. If moving to top of 25% tax bracket, I would start to look at TSP or 401k for more deductions.

**creditcardfree** · 10-08-2008, 02:26 PM

Originally posted by jIM_Ohio View Post

This becomes a tax decision more than an investment decision, IMO.

This is true. We are just tipping into the 25% tax bracket. I suppose if I put us in the traditional ira...we would definitely be in the 15%. We already get some tax breaks being in the military...some of our pay isn't taxed to begin with.

Just going to see how it plays out for this year and adjust accordingly later. The HEL allows us to deduct about $1200 per year in interest.

**jIM_Ohio** · 10-08-2008, 03:22 PM

That $1200 reduces your taxable income by no more than $300.

My understanding is the only military income exempt from taxes is combat pay, but maybe you are exempt from SS or medicaire taxes? That is another 14% savings relative to the rest of us.

If you have a TSP, I believe that is similar to a 401k. Up the TSP a percent or two, then make the IRA choice a Roth and you come out ahead.

TSP puts you into 15% tax bracket- as you get raises make sure the TSP contribution is increased (hint- raise the contribution percentage by 1% less than the raise- get a 5% raise, put 4% more into TSP; get a 3% raise, put 2% more into TSP)- this hint will keep your take home about the same as it was before- it will go up a little (like $20/month or so) and keep your taxes the same.

You earn $5750 to put $5000 into Roth (meaning pay $750 in taxes at 15% bracket).

More than likely, based on amount you save, your withdraws will be at 25%, so the Roth earned you an extra 10% (that $5000 in Roth would be same as $6250 in the TSP).

**creditcardfree** · 10-08-2008, 03:59 PM

In the military we get a housing allowance and BAS (a food allowance)...those are not taxable and don't show up on our W2. Yes combat pay isn't taxable...nor is any pay you receive in a combat zone up to a certain limit. DH is not deployed right now.

Double checked the numbers for 2008. Our gross income is just under $85,000. Our taxable income after TSP contributions is just under $64K. Looks like for 2008 that will keep us in the 15% tax bracket. The separation amount for married couples is $65,100 taxable. That makes me happy!! Of course, we have deductions we can take to lower that considerably.

So, it sounds like sticking with the IRA's are still the best deal for us. Thanks again, Jim!

Really...if anyone else has thoughts feel free to chime in on anything.

**jIM_Ohio** · 10-08-2008, 04:18 PM

I am in same situation (gross pay 100k, taxable income 63k). When you are close the 65100 taxable income mark, some simple planning will save you money. Lots of deductions in 15% bracket, some of them get phased out at top of 25% bracket (131200 I believe).

Retirement money to home equity loan?