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How to smartly use a HELOC in retirement

A HELOC could help you get through various financial circumstances in retirement.  Getty Images

A home equity line of credit (HELOC) is a unique financial tool that comes with some of the features of a second mortgage and some of the features of a credit card. When you open a HELOC, you're given a spending limit based on the equity in your home. You can then use your HELOC to cover any expense you'd like as long as your balance stays below your spending limit. 

These lines of credit may prove to be invaluable for retirees. That's because they provide a financial cushion that you can tap into at any time. Moreover, when you open a HELOC you don't have to borrow the full amount of the credit line — you can simply borrow what you need when you need it. 

Of course, if you're a retiree, it's important to be careful when using your assets — including your home's equity. So, how do you smartly use a HELOC to help you in retirement?

Open a HELOC now give you a financial cushion in retirement


How to smartly use a HELOC in retirement

First and foremost, it's important to keep in mind that any money you borrow as part of your HELOC will need to be paid back at some point. That's an important consideration because if you can't pay the money back in your lifetime, your estate will likely absorb the expense — meaning you may leave less behind for your loved ones. 

Nonetheless, there are plenty of circumstances in which a HELOC may be a smart move for a retiree. Some of the most common of these circumstances include: 

Home repairs

Chances are that you've had to repair a few things around the house over the years. Roofs, air conditioners, plumbing and electrical systems only last so long. However, these and other repairs can be costly. According to Angi, you'll pay an average of $9,224 to replace your roof. Other home repairs can be just as costly, if not moreso. 

The problem is that retirees usually live on a fixed income. So, it can be difficult to come up with thousands of dollars to cover the cost of a home repair. A HELOC can help — and there's an added incentive associated with taking this route. 

When you use the money from your HELOC to repair or improve your home, the interest you pay on the loan may be tax deductible. So, when you use your HELOC for home repairs, you could reduce your overall tax burden. 

Pay for your home repairs with a HELOC today


Limit taxable events

Like many people, you may have invested in your retirement on a pre-tax basis. That means the taxes on these investments are deferred until you withdraw the money. As such, every time you pull money out of your 401(k) or IRA, with the exception of Roth alternatives, you're creating a taxable event. 

Of course, you plan for the general taxable events associated with withdrawing the money you need on a regular basis. However, if you have a reason to withdraw a lump sum, the income could push you into a higher tax bracket — significantly increasing your tax burden. 

Rather than withdrawing a sum of money that could bump your tax bracket up, it may be a good idea to lean on your home equity. When you do, you can pay the money back over time, limiting the tax burden that comes with it by spreading the income out over several years. 

Cover unexpected expenses

Unexpected expenses don't stop the day you retire. Life is filled with unexpected events that can be costly before and during your golden years. Unfortunately, these unexpected expenses can be particularly detrimental to your budget in retirement. 

After all, when you retire, chances are that you'll be living on a fixed income. As you planned for retirement, you may have planned for inevitable expenses and created a safety net for emergencies. But when those emergencies are more costly than expected, that safety net may not be enough. 

It's during these times that a HELOC may be able to save the day. You could use a HELOC to access the money you need while absorbing the cost with small monthly payments over the course of multiple years. 

Use a HELOC to cover unexpected expenses now

The bottom line

A HELOC may prove to be a valuable tool in retirement. That is, as long as you're smart about how you use it. A HELOC may come in handy when you need costly repairs to your home or you need to cover other expenses while limiting your taxable events. Explore how a home equity line of credit can create a financial cushion for your retirement

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