Should I pay off HELOC or fund IRA's

[mtnbkr]

Looking to figure out what to do with a HELOC. First some background info:

HELOC outstanding $37K at 2.99% variable with 5 more years left on the draw.
I invest in my 401k at 6% which is 2% higher than the limit of company match (4%).
My wife invests in her 401K at 4% which is the limit of her match.
I have been fully funding 1 ROTH IRA for me and 1 regular IRA for her each year.

Looking to retire in 10 years. I will get approximately 60K per year from my pension plus SS.
Currently have $175K in combined 401K/IRA funds.

My thought is to knock out the HELOC completely over the next 3 years by stopping all funding of the IRA's but keeping the 401K investments as they are, and here is my logic.

If I continue to just service the HELOC it will cost me 12,000 in interest (provided rates don't rise) over 10 years until I sell the house when I retire and pay the HELOC off then.

When I sell the house I will still owe the 37K on the HELOC so in the end it would cost me 49K. If I suspend the IRA funding for 3 years I can pay the whole HELOC off, save $1,200 a year in interest payments and take advantage of the crazy low interest rates that are on the HELOC right now while the economy is so bad.

I know I will take some tax hit for not funding the regular IRA, but I figure the declining interest I am paying on the HELOC will offset that to some extent.

The big question is will taking a 3 year leave of absence from investing in the IRA's hurt me more in the long run than continuing to service the HELOC? I cant do both, its either pay off the HELOC or fund the IRA's.

What do you think?

[MakeAStash]

While the HELOC rate is less than the inflation rate don't pay it off. Why? If you pay later, you'll be paying with inflated (less valuable) dollars while your IRA grows. If a loan's rate is less than inflation, in terms of real dollars it's a no-interest loan.

[thesimplemoneyblog]

Is there a cap for the rate on your HELOC? When you say you have 5 years left on the draw for the HELOC, do you mean you have 5 years of not having to make payments and you are currently in an interest only period?

Given the low rate and potential deductibility of interest (not sure if you itemize on your taxes or not given that it is a low loan amount and thus low interest each year), you would probably be better off for the next 10 years to fund your IRAs and let it grow, as it may be possible to earn more in your IRAs than the rate you are currently paying on the HELOC. Depending on your willingness and ability to take risk in your IRAs and 401(k)s, a reasonable return expectation for a balanced investment approach over a long period of time could be in the 6%-9% range per year which would outpace the HELOC significantly.