01 Sep Should I cash out retirement plan to pay off HELOC?

Q. I am a widower with two children. I am a retired school administrator with a decent pension and medical benefits until I’m 65. My children will have my benefits until age 26. One child is in college and the other will be in two years. I have a low mortgage rate on my first mortgage, but took an interest-only line of credit out on my house when rates were really low. Now that interest rates have gone up considerably, so has the payment on the interest-only line of credit. This increase has tightened my budget considerably. I could pay it off, but it would use up most of the money in my 403(b) plan. Should I do it?
— Needing help

A. There’s a lot to consider before you cash out your retirement plan.

It’s a big step to take.

A 403(b) plan, which would fund your retirement years, and should only be considered as a last resort and part of a comprehensive financial plan, said Michael Green, a certified financial planner with GYL Financial Synergies in Parsippany.

Before you make the decision, there are several items to consider.

First, there will be tax implications.

“Withdrawals from a 403(b) account are generally subject to income tax, and if you’re under 59½ years old, you may also face a 10% early withdrawal penalty,” Green said. “This could significantly reduce the amount of money you receive from the withdrawal.”

It’s possible, depending on your age and income level, that you qualify for New Jersey’s pension exclusion, so you may want to speak to a tax advisor to see how this would work out for you.

You should also look to the future, Green said.

“A 403(b) is a retirement account meant to provide for your future after you stop working,” he said. “Taking money out prematurely could hinder your retirement savings potential, and you might miss out on potential growth from investment returns over the years.”

Then there’s the debate about interest rates and investment returns,

With high rates, you should compare the interest rate on your line of credit to the potential investment returns your assets could generate over time, Green said.

Because your line of credit has a high-interest rate, paying it off might make sense to avoid accumulating more debt, Green said, but you should consider other sources to fund the payoff before your 403(b).

Then consider your short-term and long-term financial goals. It might be worth considering if paying off the line of credit would significantly alleviate financial stress, improve your credit score or help you achieve other immediate goals, Green said.

Using retirement funds to pay off debt should be a last resort due to the potential negative impacts on your future financial security, he said. It’s essential to carefully weigh the pros and cons and consider alternative solutions before making a decision with such a significant impact on your financial future, he said.

Green said he recommends you consult with a financial planner or tax professional before making this decision.

“They can provide personalized advice based on your specific situation and help you understand the potential outcomes,” he said. “There are too many unknown variables, and the consequences of a misstep are too significant to make this decision in a vacuum and without the help of a financial professional.”

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This story was originally published on Sept. 1, 2023.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.