Question: I plan to do home improvements that will cost $35,000. I have saved $15,000 and while I know taking money from my IRA is generally not a good idea I’d rather do that than get a loan. What are your thoughts? J.R.
Answer: Since you are under age 59½ you’ll face both income taxes and a ten percent federal penalty. By my estimate, in order to raise the $20,000 of additional money you need for your renovation, you’ll need to withdraw a total of $31,500 and set aside $11,500 for income taxes and penalties. That’s a very high price to pay. Let’s look at a couple of alternatives.
1. Get a home equity line of credit (HELOC). The interest rates for these loans are based on the bank’s prime lending rate which is currently 3.25%. I’ve seen loans anywhere from prime minus one percent to prime plus one percent (or more depending on your credit score). They are often based on an ‘interest-only’ minimum payment so initially your payments based on a prime-rate loan would be under $60 per month. You could then use extra money, bonuses, and pay raises to pay off the loan over time. As an added bonus, your interest payments are deductible so Uncle Sam is providing a helping hand. Assuming interest rates remain unchanged and you systematically repaid this loan over five years, your total interest charges would be approximately $1,700. Throw in the benefits of a tax deduction and you’ll cut that to less than $1,300. Compare this to the $11,500 of taxes and penalties if you simply take an early withdrawal.
2. Borrow from your 401k plan. Most plans will allow you to borrow 50% of your balance up to $50,000. This is a tax-free loan assuming it’s repaid. Under most plans, these loans must be repaid over a five year period and the typical interest rate is prime plus one percent. Note that the interest you are paying here is to yourself. In other words, you are acting as your own bank. Your employer will also set up an automatic repayment schedule that will be withheld from your paycheck. Based on current interest rates and assuming you get paid every two weeks, the withheld amount would be about $200. A couple of warnings are in order: If you leave the company, most plans require the loan be repaid in full. If you default on the loan, the unpaid balance would be treated as a withdrawal and subject to the federal penalty, if applicable, as well as being subject to income taxes.
Both of these general contractor insurance are significantly better financial options than simply taking an early withdrawal and paying the penalty and taxes. If you start with one of these two options and change your mind, you can always take an early withdrawal and pay off the loan.
Question: I bought EE Bonds in 1985 which will mature in 2015. What’s my best plan of action? N.W.
Answer: EE Bonds purchased in 1983 accrued interest at 7.5%. These bonds ‘recalculated’ the interest rate every ten years. Today, they are paying 4% until maturity in 2015 at which time no interest will be paid. Four percent is much higher than rates you could get at any bank today so I recommend holding your EE Bonds until maturity and then cash them in.
Question: In 1999 our son and son-in-law purchased a long-term care insurance policy on my husband and me and elected a 10-pay premium plan. My husband is in good health while mine is excellent. We are age 80 and 81. If we never use the policy benefits, are all the premiums they paid lost? Is it a ‘use it or lose it’ deal? V.J.
Answer: It depends. Most long-term care insurance policies are based on a use it or lose proposition. In most cases, you can pay a higher premium and get a contract that guarantees that any unused benefits will be returned to the policy owner at the death of the insured. The best way to find out the answer is to call the agent who wrote the policy.