HELOC vs IRA Withdrawl

[panerd]

So I would say 99% of the people I ask all answer this the same way but wanted to bounce this idea off you guys.

When we had twins 3 years ago my wife stopped working as the cost of daycare wasn't going to be a whole lot less than her salary (we had another 2 year old also) plus the benefits of her staying home with them. Fast forward to three years later where our "nest egg" has finally reached it's end.

So we will have two years until they are in kindergarten and two years of negative monthly income. So the question comes up of whether to dig into a decent amount of equity we have in our house or to take some money out of our Roth IRA's. Everyone seems to lean towards the HELOC but my question is why? I think the main reason people state is that you will never get around to repaying the IRA but isn't there equal harm in losing all that equity in your house. All things being equal... $40K equity vs 40K penalty free IRA money why is taking the IRA always answered as the bad choice?

[JPhillips]

With rates where they are currently, returns on the 40k in the IRA should be greater than the interest on the money added to the mortgage.

[panerd]

Originally Posted by JPhillips

With rates where they are currently, returns on the 40k in the IRA should be greater than the interest on the money added to the mortgage.

Yeah that was the thought and there's no arguing that. I guess I am just of the mindset of preferring a set loss from my IRA vs another loan hanging over my head with the potential for a loss/stale growth on the IRA and jumping rates on the HELOC.

[Toddzilla]

You can deduct HELOC interest from your taxes. From everything I've been told by my financial advisor, withdrawing money from your IRA is a big loss when you include penalties, additional taxers, and loss of future interest. You should be able to get a HELOC with a great rate if your credit good.

[Edward64]

Everyone's situation is different, certainly don't know yours and I know this does not answer your specific question ... but IMO

I would do what I possibly can to not dig into further debt (home equity) or compromise retirement (Roth) by reducing my expenses or possibly you finding higher paying job.

The assumption that after 2 years, kids are in kindergarten, wife starts working again, and therefore no more monthly negative income statement may not come true.

May be in an overdue recession, wife may not find the right job, higher expenses for kids as they get older, there may still be some after kindergarten childcare etc.

[bob]

Originally Posted by Toddzilla

You can deduct HELOC interest from your taxes. From everything I've been told by my financial advisor, withdrawing money from your IRA is a big loss when you include penalties, additional taxers, and loss of future interest. You should be able to get a HELOC with a great rate if your credit good.

I don't believe HELOCs are tax deductible in the new tax bill.

[panerd]

Originally Posted by Toddzilla

You can deduct HELOC interest from your taxes. From everything I've been told by my financial advisor, withdrawing money from your IRA is a big loss when you include penalties, additional taxers, and loss of future interest. You should be able to get a HELOC with a great rate if your credit good.

Appreciate the response. This would be withdrawals from deposits made into a Roth IRA so there would be no penalties however you are correct about the loss of future gains. Also our situation is pretty straightforward as a teacher with three kids. Standard deduction, itemized deductions don’t even come close and that’s on the old tax system.

[panerd]

Originally Posted by Edward64

Everyone's situation is different, certainly don't know yours and I know this does not answer your specific question ... but IMO

I would do what I possibly can to not dig into further debt (home equity) or compromise retirement (Roth) by reducing my expenses or possibly you finding higher paying job.

The assumption that after 2 years, kids are in kindergarten, wife starts working again, and therefore no more monthly negative income statement may not come true.

May be in an overdue recession, wife may not find the right job, higher expenses for kids as they get older, there may still be some after kindergarten childcare etc.

Yeah totally agree. We do have car payment when we bought a van for the large family. But outside of that our lives aren’t very interesting just a teacher pulling in about enough to pay for mortgage, food, gas, utilities, and cable/internet. The preschool costs and van payments and anything else we spend is what puts us over. That is the drawback of the HELOC to me is the Roth withdrawals “hurt” a little more and keep us focused on not doing anything dumb with our money. Wish I could say we are going on vacations or buying new clothes etc but that’s pretty much it. My one saving grace is our families could both help us out if the shit ever did hit the fan or she couldn’t get a job but I feel like a HELOC or retirement dipping certainly takes priority over that. My sister sponges off my parents and it’s a little shameless IMO.