Use HELOC to Max Out Retirement Contributions.

It’s no secret that, due to poor retirement planning, millions of baby-boomers face a retirement crisis. The old-fashioned company pension no longer exists for most workers and responsibility for retirement saving rests almost entirely with the individual. The problem is many (maybe most) boomers are fast-approaching retirement with woefully inadequate savings.

Addressing this problem, Congress created the “catch-up” provision. In a nutshell, under the catch-up provision tax-advantaged retirement programs (e.g IRA’s, 401k, 403b, 457) generally permit workers to make supplemetnal (”catch-up”) contributions starting in the year the worker turns age 50. The amount of allowable catch-up varies by the type of retirement program but the intent is the same: help older workers make up for lost time before it’s too late.

Here’s a link showing the current allowable retirement plan contributions and catch-up limits.

Still, many people fail to take advantage of this opportunity because they feel they cannot afford any further reduction in their take-home pay.

Under some circumstances, it may sensible to borrow against your HELOC loan to free-up the cash needed to max-out retirement plan savings. Things to consider:

1. Does your employer match contributions? - When it’s possible to get a 25%, 50%, or even 100% immediate return on your contributions, the decision is easy: be sure to get the full benefit of the match even if it means borrrowing from your HELOC loan.

2. Do you intend to sell your house within ten years? - If, for example, you are 55 and plan to sell your house when you retire at 62, it may be worthwhile to borrow on your HELOC today to fully fund a retirement account. HELOCs generally allow for interest-only payments for several years meaning you will pay relatively low, tax-deductible interest until the house is sold and you are able to pay the principal balance. With this strategy, you transfer funds from one savings category (home equity) to another savings category (tax-advantaged retirement account) to gain the advantage of higher-yield retirement account investments compounding for a longer period.

3. Can you control or restructure spending habits? - Ideally, retirement savings should come from current income - not from borrowing. If you are unable to accumulate retirement savings from current income, it is a sign that you are living beyond your means. As mentioned, HELOC borrowing to help fund a retirement account is not a form of new savings - rather, it is simply the transfer of home equity savings to retirement savings. Borrowing from a HELOC to fund retirement savings should be regarded as a temporary fix made possible by the inherent flexibility of HELOC loans; your primary goal should always be to achieve savings from recurring income.