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Any disadvantage to this plan?
Old 05-10-2011, 09:45 AM   #1
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Any disadvantage to this plan?

I'm thinking of this plan but have not implemented it yet. I retired 1 year ago. To date, I have not taken any funds from my tax exempt retirement accounts.

I have a large Home Equity Line of Credit (HELOC) that I have not used. Interest presently is 2.75% if I borrow from this HELOC.

I also have a large IRA in a 10 year CD at Penfed which pays 5%.

I need $12,000 net per year as a supplement for some of my living expenses. My effective total tax rate is 8%. So the $12,000 withdrawal from my IRA would cost me $960 in taxes.

Here is my thought: When the time comes when I've exhausted my funds in my taxable accounts, why not take the $12,000 from the HELOC, pay the 2.75% interest and pay no taxes; and continue to let the IRA grow at 5%. I would be ahead 2.25% (5-2.75) and not pay the tax until later.

Any flaws in this scenario? Thanks.
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Old 05-10-2011, 09:51 AM   #2
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Among others, if short term rates rise you could be paying a lot more than 2.75% for the HELOC. What is the eventual plan to repay the HELOC in your scenario?
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Old 05-10-2011, 10:08 AM   #3
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Quote:
Originally Posted by hogtied View Post
I need $12,000 net per year as a supplement for some of my living expenses. My effective total tax rate is 8%. So the $12,000 withdrawal from my IRA would cost me $960 in taxes.
The relevant tax rate to use in this analysis is the marginal tax rate on the 12K withdrawal, not your effective tax rate.

Another thought would be to use a smaller IRA withdrawal to pay just the interest on the HELOC. If you are itemizing, you would likely pay no taxes on the IRA withdrawal since it would be offset by the HELOC interest deduction.
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Old 05-10-2011, 11:07 AM   #4
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I don't want to get punched in the face like Tyson, Brewer, that's why I'm putting this out there.
I'd have to pay back the HELOC from an IRA sometime out in the future or a not yet rec'd inheritance which is fairly definate but (rather not count my chickens...).
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Old 05-10-2011, 11:09 AM   #5
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Fired@51, good thought about paying interest from IRA yearly. I'll ponder that.
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Old 05-10-2011, 11:12 AM   #6
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I know short term rates will surely rise at some point. My HELOC allows me to lock in the current low rate anytime. When rates start to climb I would most likely put an end to this plan and start withdrawing for my IRA unless I can get a higher CD rate from Penfed to offset the HELOC rate.
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Old 05-10-2011, 12:24 PM   #7
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Any advantage to convert some of the $$ from TIRA to Roth IRA and use the Roth funds?

If you got sick, is there anyone this could impact as it might be out of sight, out of mind for awhile? HELOCs can increase drastically and CD rates can drop quickly/renew at a much lower rate.

I prefer to keep it simple.
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Old 05-10-2011, 12:36 PM   #8
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borrowing retail (mortgage) and loaning retail (CD) is not likely to yield a meaningful return.... even if there is a tax disparity.

Plus, the CD imposes a liquidity risk. You can cash it out... but at a reduction. If the heloc increases, it could wipe out the slim marginal gain.

Did you calculate your expected gain net of any expenses or taxes?

Plus... you will be paying principle payments on the heloc... which would increase your ongoing expenses.

There is typically no free lunch!
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Old 05-10-2011, 01:24 PM   #9
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Sounds like your taxes might be lower now than in the future. A Roth conversion may be beneficial.

I wouldn't mind using the HELOC and leaving the CD in place. But you need an exit plan if the HELOC rate increases too much.
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Old 05-15-2011, 08:24 PM   #10
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It seems like a reasonable plan, although I'd be careful about going overboard with having a too big a HELCO as we have seen. Banks can freeze and even cancel them during tough times.

That said I do anything humanly possible to avoid withdrawing money from the 5% PenFed CD including borrowing from a HELCO. If rates stay low the 10 year 5% CD may turn out to be fantastic deal, right now a brokered CD with a 5% coupon and a 7 year maturity is selling for $1.08. The Penfed CD has some significant advantage including the fact that you can always redeem at par with interest (less the 5% early withdrawal penalty). Having such an CD in an IRA is even more valuable, and I would gladly pay $1.10-$1.12 in pre tax money for one.

I don't enough know about your finances, put as long as you are in a situation, to make payments if they freeze your HELOC or the rate shoot up. I'd be comfortable with what you propose.
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