I want to retire in 2 years but my recent home renovation cost $100K more than I planned for — should I use a HELOC or withdraw money from my Roth IRA to pay the bill?

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.

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.