How would you pay off 90k home equity loan?

[jpjr]

We retired debt free, but family circumstances forced us to cash out some IRAs and also take out a 90k home equity loan. I hate debt. We currently have 750k in regular IRAs and 100k in Roth IRAs. We have withdrawn our annual expenses already for 2015 and any additional withdrawals will trigger higher taxes. The loan floats so until the fed raises rates we are around 4%. I am tempted to liquidate the Roths. Hope this is enough info to generate some discussion. (I'm 65 wife is 63. She is collecting SS. I am not.) Thanks

 

[Rothman]

I wouldn't pay it off all at once. Last place I pull money from is Roths. In same situation I likely pull a little extra from trad IRA each year when fund growth is strong. Maybe it takes 5-7 years but I don't like large loss of savings and worse to take from your tax free forever no RMD account. Your suggestion sets you up for nothing but taxable accounts long term.


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[cooch96]

At 4% I'd pay just the monthly amount. I totally understand your aversion to debt, but my aversion to taxes is even stronger.

 

[homestead]

Just wait until you have to start taking RMD's and pay it off then.

 

[karluk]

I am extremely unenthusiastic about the idea of almost completely liquidating your Roth IRA to pay off this debt. But without any information about your budget and tax bracket, it's hard to say whether you have a reasonable chance to pay off the debt without dipping into the Roth.

I would certainly not make any hasty decisions. You're lucky that the interest rate is currently only 4%. That's low enough that carrying the debt for a while isn't going to be too expensive. At the least, I would try waiting until next year, when you can withdraw more money from your traditional IRA without bumping yourself into a higher tax bracket. Hopefully you will have some cash then that you can use for debt repayment.

 

[pb4uski]

The aversion to debt by many is downright silly. While you don't say what you are invested in, if you have a well balanced portfolio you are very likely earning more than you are paying tax-deferred or tax-free, plus you are likely getting some tax benefit from the interest. I agree with others that it would be foolish to liquidate the tax-free Roths just to be debt-free as you can't get back into tax-free Roths once the money has been taken out unless you go back to work so you have income and can then make Roth contributions or do Roth conversions.

Decide over what term you want to pay off the home equity loan, start making payments on that schedule and build the cash outflow into your future withdrawals and reassess if interest rates increase later. Be happy that if push came to shove that you can pay off your home equity loan with the swoop of a pen or click of a mouse and sleep well.

 

[jpjr]

Thanks to all for your input. Liquidating the Roths was/is a very uncomfortable feeling, but your consistent responses reinforce my inner thoughts. We got to where we are because we paid off all debts several years before retiring and were able to sock away significant % of our income. Psychologically, finding ourselves with a red number on our balance sheet is what is driving me nuts. I am worried about a sudden downturn in the market that wipes away 10% of our funds, but we will stay the course and work this off over the next few years.

 

[Mulligan]

Thanks to all for your input. Liquidating the Roths was/is a very uncomfortable feeling, but your consistent responses reinforce my inner thoughts. We got to where we are because we paid off all debts several years before retiring and were able to sock away significant % of our income. Psychologically, finding ourselves with a red number on our balance sheet is what is driving me nuts. I am worried about a sudden downturn in the market that wipes away 10% of our funds, but we will stay the course and work this off over the next few years.

Dont let it eat you up, JP. Im with PB on this. I have been in debt my whole life since my first student loan. Five years into retirement I still owe money and not just my mortgage. But those Roths... I would guard those. In fact, I love Roths so much, I will still work a bit each year. Not to pay off any of my debt, but to add to the Roth.


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