401K loan and a HELOC

[skipro3]

5 years ago my home burned down. I rebuilt using insurance coverage along with an additional $50,000 I took as a loan on my 401K. The loan is being repaid back to my account over 15 years and at 9% interest. The interest and principal are paid back to me at AFT (After Tax Dollars) The loan itself was not claimed as income the year I withdrew it.
So, here I am, a year out from retiring and I will still owe about $45,000 on this 'loan'. Once I retire, I no longer have to pay myself back, the loan payments only being required to avoid an early withdraw penalty. However, the remaining balance on the draw will be considered income for that first year I'm retired with all the taxes that implies.
I'm considering using a HELOC I have available to me; $200,000 @ 4% with a payment of 1.25% of the amount borrowed as monthly payment.
My thought is this; I will be taxed on the $45,000 remaining I had borrowed the first year I'm retired and added to my retirement income, could result in several thousand in taxes. However, I could pay back my 401K with the HELOC prior to retirement and make a payment of 1.25% of the loan balance I borrow from my HELOC; about $562 a month. My current payment on the 401K loan to myself is $515 a month.
So, would it be better to just pay the tax hit up front as the loan turns into a draw that first retirement year, or to borrow from the HELOC and pay simple interest, which is tax deductible for the life of the HELOC loan?
I almost forgot to add; Not only is the interest on the HELOC tax deductible, the $45,000 from it is going back into my 401K account and earning it's growth as well, increasing that account by $45,000.

[Alan]

You are going to have to spend some time running some numbers.

If I read your post correctly you would take a loan of $45,000 at 4% with a monthly re-payment of $562. That would mean you pay off the loan in ~7 years and pay $7,434 in interest.

You need to figure out what additional taxes you would pay on the $45,000 the year you retire - if you use Turbotax or similar you should be able to work it out. eg if all $45k hits the tax rate of 25% you'll pay an additional $9k tax.

Although the interest ($1,700 in the first year) on the HELOC is tax deductible you will only get relief on the full amount if your itemized deductions are greater than your standard deductions. Again, you'll need to use that tax software to estimate taxes in your retirement years to determine how much relief you will get.

[skipro3]

Thanks Alan, sounds like you got the idea I was puzzling over. I am sure I will be filing long form for taxes, itemizing deductions, so I should be able to continue to take the interest deduction over the years. Also, by paying back to my account, the $45,000, I now will have $45,000 continuing to grow at what will probably be a very modest rate of 2% or so. With the $45K back in my 401K earning growth and the interest deduction off the 4% I'd be paying on the HELOC draw of that amount, I should realize a better deal than just paying taxes on the $45K as it becomes income that first retirement year. I'm sure it would ALL be in the 25% bracket.

I think I'll run this question past a CPA friend I have. I'm sure it would be worth the hour or so time it might cost me to just be sure.
Again, thanks!!

[Alan]

Quote:

Originally Posted by skipro3 I think I'll run this question past a CPA friend I have. I'm sure it would be worth the hour or so time it might cost me to just be sure. Again, thanks!!

Great idea. You have plenty of time to run the numbers.