I need money. Should I tap into my retirement funds or get a home equity loan?


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Illustration by Martin Gee


Many Americans have depleted their emergency savings after losing their jobs or receiving a lower income due to the Covid-19 pandemic. Now they are looking for other sources of funds to stay afloat.

Depending on your situation, two options are to withdraw your retirement funds or get a home equity loan, says Ryan Franklin, director of consulting at the Moss Adams accounting firm in Seattle.

However, the first step is to consider short-term budget arrangements, such as cutting expenses or selling assets, he suggests. If you still need funds and have owned your home for a while, a home equity loan might be a good option.

For a home equity loan, borrowers use their home as collateral and receive a lump sum payment that is repaid with interest, usually over a fixed period of time. A home equity line of credit, or Heloc, is similarly secured by the home, but it is an open line of credit that a borrower can take advantage of in increments over time.

The amount of the Home Equity Loan or Heloc is determined by the value of your home, minus the outstanding balance on the mortgage. Generally, the “loan to value” – the total of all loans against the property, including the new home equity loan – cannot exceed 85% of the value of the home.

“Home Equity Loans Make Sense Right Now Because House Prices Are High [and] interest rates are low, “says Franklin. Caution: defaulting on the loan could lead to foreclosure. And while a home equity loan may be attractive, it won’t help if you’re a renter or haven’t built up a lot of equity yet.

Congress has made it much easier and more attractive for people under age 59½ who have been affected by the pandemic to withdraw funds from their retirement accounts. Under the Cares Act, you can get a penalty-free distribution of up to $ 100,000 from a qualified 401k or IRA in 2020. The money will be taxable, but only one-third a year for three years.

Of course, there is a catch. To be eligible for retirement plan withdrawals under the Cares Act, you must have a valid coronavirus-related reason to access your funds. This includes you or your spouse who is diagnosed with coronavirus, or experiences layoff, leave, job reduction, or the inability to work due to the pandemic or lack of childcare.

But there is a nice benefit: You can avoid income taxes by putting the money back in your retirement account. “You get the cash today and you have some time to decide,” says Franklin. “If your income recovers and you have the ability to repay it, you can put it back there.”

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