Aug 13, 2024
When retirement is on the horizon, it doesn’t always make sense to sink money into home renovations, especially if you plan to downsize and move to a smaller space or relocate. But a growing number of Americans are opting to age in place – meaning, stay in their existing homes and, as needed, modify them to accommodate mobility issues.
In fact, a 2024 survey from Today’s Homeowner finds that 89% of Americans over 55 have the goal of aging in place.
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But what if you decide to renovate or remodel your home ahead of retirement only to find that the work goes way over budget? It can happen easily. And at that point, you may not be sure how to tackle that added cost.
One option may be to borrow against your home with a home equity line of credit, or HELOC. Homeowners ages 65 and over have a median $250,000 in home equity, according to the National Council on Aging.
But if you have retirement savings, you may decide to use them instead. And if you have a Roth IRA, that withdrawal may not even be taxed, so that’s a win.
The question is, which is the better choice?
The pros and cons of using a HELOC
A HELOC gives you access to a revolving line of credit you can tap over a preset period of time – often up to 10 years, but sometimes longer or shorter. If you don’t need to use your entire line of credit, you can simply borrow what you do need and accrue less interest. Most HELOCs have variable interest rates but they tend to be lower than those of other kinds of debt, like credit cards or personal loans. Interest you pay may also be tax-deductible if you’re using the money for home improvements.
The upside of using a HELOC over taking a Roth IRA withdrawal is that you’re leaving yourself more liquid. Handing over a large sum of money at once gives you that much less leeway in the event of a financial emergency.
On the other hand, a HELOC is a debt obligation. Not only does that mean racking up interest, but it also means that if you fall behind on payments, you could risk damaging your credit, making it harder to borrow again in a pinch. Since HELOCs usually have variable interest rates, there is a risk your payments could rise too.
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It’s particularly dangerous to fall behind on HELOC payments because these lines of credit are secured by the equity in your home. Your HELOC lender could force the sale of your home to get repaid if you become delinquent.
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The pros and cons of using a Roth IRA
The nice thing about tapping your Roth IRA to pay for an over-budget renovation is that you can withdraw your contributions (not earnings) penalty-free and tax-free at any age, and you’re not taking on any new debt. If you want to withdraw your earnings, you could face taxes and a 10% penalty.
Having to make HELOC payments can be stressful even when you’re working and expect to continue doing so for many years. But when you’re on the cusp of retirement, new debt can be dangerous.
Once you stop working, you may find that you’re forced to live on less income than you’re used to. Having to make regular HELOC payments on top of your other bills could be very stressful. If you raid your retirement account to pay off your balance, there won’t be debt hanging over your head.
Of course, the downsides of using a Roth IRA are giving up the freedom of having more money at your disposal, shrinking your nest egg and losing out on potential gains. If you remove a large sum of money from an IRA – Roth or otherwise – that’s money that can no longer be invested and grow with the magic of compounding. And remember, Roth IRAs get to grow on a tax-free basis, so that’s a big loss.
Plus, you may need to time your withdrawal very carefully. If you liquidate assets in your Roth IRA while their value is down, you’ll lock in permanent losses in that account.
If you’re going to use a Roth IRA to cover a home renovation, or any other large expense that arises close to retirement, make sure you’re able to leave the bulk of your savings intact. Taking $100,000 out of your savings isn’t a great idea when your total balance is $400,000. But if you have a $2 million IRA, that’s a very different story. So in addition to the pros and cons above, you’ll need to consider your account balance when making your choice.
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Maurie Backman has been writing professionally for well over a decade. Since becoming a full-time writer, she's produced thousands of articles on topics ranging from Social Security to investing to real estate.
