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Many Americans don’t save as much as they need for retirement and find themselves strapped for cash or working longer than they would’ve liked. If you haven’t spent decades investing in a 401(k) or individual retirement account (IRA), you may be able to use your home equity for retirement expenses, but you should be careful.

Selling Your House Could Help You Cut Expenses or Invest for Retirement
If you have significant equity, or if your mortgage is paid off, selling your house could allow you to access the equity you have built up. If you bought a smaller house, you might be able to pay cash. In addition to eliminating a mortgage payment, you’d likely spend less on utilities, property taxes and maintenance. If you decided to rent, your landlord would cover taxes and maintenance.

Taxes on home sales generally don’t apply to the first $250,000 of capital gains or to the first $500,000 for a married couple filing jointly, as long as they’ve lived in the house for at least two of the past five years. If you sold your house, walked away with a profit and didn’t plan to retire in the immediate future, you could invest that money in a retirement account to give it an opportunity to grow before you reached retirement age.

Using Home Equity for Expenses During Retirement Could Save You Money
If you decided to stay in your home during retirement, you could tap into your equity for major expenses, such as repairs, renovations to make the house safer and medical expenses. A home equity loan would provide funds in a lump sum, while a home equity line of credit (HELOC) would allow you to access money as you needed it.

If your retirement savings are held in a 401(k) or IRA and withdrawals are taxed, they must be counted as income on your tax return. A large withdrawal for a major purchase could push you into a higher tax bracket.

Using home equity might be a better option since the interest charges could be less than the additional taxes you’d pay if you withdrew money from a retirement account. Before you decide to use either option, consider the interest rates and whether the monthly payments would fit into your budget if you’re no longer working.

Create a Safe and Comprehensive Retirement Strategy
Your house is probably your most valuable asset. If you’ve built up substantial equity, selling your house could put you on more stable footing when it comes time to retire. Using a home equity loan or HELOC to cover expenses in retirement might make sense in some cases, but you shouldn’t plan on using home equity as a major source of income after you stop working. Prioritize saving through a retirement account, and consider your home a possible source of additional income if you should need it.

This article is intended for informational purposes only and should not be construed as professional or legal advice.