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I know, I know. It is universally accepted that taking a 401k is a bad idea. But I am still seeking input from the board. My wife & I have aggressively saved for retirement and now have $1.5 M in our retirement accounts. We are 50 and would likely consider ourselves financially independent when accounts hit $3 M ($120,000/year using 4% withdrawal rate), in 8-10 years by mirroring Pro recs.

One "issue" in our financial life is the home equity loan we have that has a balance of just under $30k. We have ~$300k equity in the house (8 yrs left on a 15 year mortgage). Plus, my wonderful wife would like to do a $20k basement/backyard remodel.

One option would be to stop or drastically cut back on our 401k contributions for 12-18 months and use ALL of those contribution to pay off the home equity loan and perhaps pay for remodels in a staged approach.

Another option would be to take out the 401k loan of $30-35k to pay off equity line, and do one of the remodeling projects.

I feel very stable in my job (professor) as does my wife (physician) so the concern of having to paying off loan earlier than expected is minimal, but still a possibility.

What are your thoughts of those two options and what better options am I not thinking about. Thanks in advance for your input. I am typically a lurker on these boards, but this is a time that I would love some input from people smarter than me!

Tim
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First thought....how much of a hardship is it to cashflow the HELOC? Are you just wanting it paid off because you don't like having the debt, or is there are budget crunch? Do you really NEED it gone immediately?

I'm not a huge fan of suspending 401k contributions to accelerate the HELOC repayment. You can only get ~$35k a year into that account between the two of you, period. Assuming you both max out annually, a year of missed contributions can't be made up. Plus, if you have any sort of employer match, that's free money you're giving up.

You've already mentioned the job security angle, so I won't mention it here. Obviously the worst case scenario is loss of the job with a 401k loan outstanding. If you don't have the ability to repay within 60 days, it costs you a ton in penalties.

Most people are quick to point out that a 401k loan gives up potential investment gains - true, but it also insulates against potential investment losses. Also, whatever interest rate you pay back (my play is around 4% currently) goes into your account balance. That can almost be though of as moving part of your 401k into a fixed return investment - although it's fully contingent on your ability to repay the loan.

I can understand where you're coming from. DW and I have probably 90% of our investment assets tied up in 401k accounts. We're in the process of buying a house, and DW brought up the idea of taking 401k loans to "rebalance" our assets. We could each "borrow" up to $50k and repay over 10 years (DW's plan allows her to go up to 30 years) while locking in a 4% annual return - as long as we can make the payments. If I park the cash somewhere safe, what's the risk? Loss of potential investment gains... Probably makes more sense to leave the money in the account and just continue saving more on the side. Granted, it would feel better to have more liquid assets instantly, but if you ever tap that cash for anything, that's where the risk creeps in - if you can't pay it back instantly.

BTW, two things I've always found true while remodeling - it costs more than expected, and it takes longer than expected. Just something to keep in mind...
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Hi-

My concern is that you don't have any savings outside the 401K. Sounds to me like you have a bit of a spending problem. I don't think you can get out of debt by borrowing money.

You need to look at your lifestyle and see where you can cut back. If your only emergency fund is the HELOC, that's a huge red flag.

I think you absolutely should not go more into debt for this- pay off the HELOC out of your salary, get at least a 6 month emergency fund saved up, and get your life in the place where you have substantial assets both in and outside of the 401K.

How would one of you getting disabled, for example, affect your ability to live your life. I bet your lifestyle is EXTREMELY out of whack with your income.

D.
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One "issue" in our financial life is the home equity loan we have that has a balance of just under $30k. We have ~$300k equity in the house (8 yrs left on a 15 year mortgage). Plus, my wonderful wife would like to do a $20k basement/backyard remodel.

I would start from a different angle. What's the cheapest, most efficient way to pay off the HELOC and do the remodel ? Depending upon the value of the house, I'd do a cash out refinance.
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You can only get ~$35k a year into that account between the two of you, period.

Since both of them are age 50, they could get $46k into the accounts.

PSU
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Your options are like a dumbbell 100% this or 100% that. Why not just pay off what you can on the HELOC while you continue to save for retirement? Yes the load will be around for longer - so what?

I am one of those people who did not take retirement funds out, so I don't know about loans - but no one has mentioned penalties for using 401k funds. I thought there was something like a 10% penalty. Since my wife and I are both over 60, that is not an issue for us.
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>>>Also, whatever interest rate you pay back (my play is around 4% currently) goes into your account balance. That can almost be though of as moving part of your 401k into a fixed return investment <<<

Unless I misunderstand, you are just moving money from one pot to another.

buzman
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Don't ever take a loan out on the 401K. Things can happen unexpectedly and you can find yourself in a worse situation.

Other than wanting to be debt free, is there any pressing need to pay off the $30k? If not, let it ride.

Is there any reason to do the $20k remodel today? If you could wait one year and try to stash away $2k/month you could do it in cash.

If after a year you've saved up $24k, you might say we can wait another year to remodel and have your HELOC paid off after 3 more months.

All this assumes you have an appropriate emergency fund already set aside. Typically 3-6 months living expenses.

JLC
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tboomer62: "I know, I know. It is universally accepted that taking a 401k is a bad idea."

Nearly universal. I am not categorically opposed to 401-k loans if they make economic sense and you understand the risks.

My wife & I have aggressively saved for retirement and now have $1.5 M in our retirement accounts.

"One "issue" in our financial life is the home equity loan we have that has a balance of just under $30k."

Why is it an issue. If you take out a 401k loan to pay-off the HELOC you still have loan outstanding, and required payments, presumably monthly.

What would change if you did this?

"We have ~$300k equity in the house (8 yrs left on a 15 year mortgage). Plus, my wonderful wife would like to do a $20k basement/backyard remodel."

Is that one remodel or two different remodels? And have you bid any of the work (i.e., do you know the pricing) or is 20k your guess? As someone noted, construction often encounters glitches (which is why many contracts have contingency amounts) even when bid on full construction drawings.

"One option would be to stop or drastically cut back on our 401k contributions for 12-18 months and use ALL of those contribution to pay off the home equity loan and perhaps pay for remodels in a staged approach."

Certainly, but as one poster noted, there are annual limits to contributions and no going back to fill in years in which you missed makig the full contribution.

"Another option would be to take out the 401k loan of $30-35k to pay off equity line,"

You are simply trading one loan for another loan: ic annot make sense out of this thought.

"and do one of the remodeling projects."

If you can do the remodeling project this way, why not simply leave the HELOC alone and do the remodeling out of cash flow?

Or, as another poster noted, consider a cash-our refi in an amount sufficient to pay the exiting mortgage, the HELOC and the remodeling costs, perhaps on a 15 year amortization. If done this way, you would still likely have the option of prepaying the new mortgage over the 8 years left on yoru current mortgage (perhaps even at a lesser monthly P&I payment, depending upon many variables).

Regards, JAFO
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Thank you for the quick and thoughtful replies. I appreciate the advice to think beyond the options I posed. We have some decisions to make, but will likely:

- cut back 401k contributions to the level that still gets the employer match

- explore a cash-out refi, although our current 15 year mortgage at 2.75% may not make the numbers work

- hold on any remodeling until for 12 months while we pay down on HELOC using previous $ going to 401k and other saving that was going to kids college funds

- re-evaluate all spending. We subscripted to YNAB last month so that was already in process.

Thanks again for helping us think this through.
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