This is probably an odd question. I did see a similar question posted years ago in this forum, but it looked specific to the Canadian retirement system. Rather than necro that one...
Is it crazy to consider using a prime-rate HELOC (currently 4.25%) to help fill up pre-tax buckets in the US? If so, why?
Let's say someone had zero debt, a solid emergency fund, and only has enough income this year to contribute $9,500 toward the company 401k. Would it make sense to withdraw $10k from the HELOC to max out the 401k? The immediate benefit would be $2,200 less paid in taxes this year. The longer term benefit would be greater potential for tax-deferred compounding to occur (earlier FI, etc.). The short-term downside would be paying back the $10k on the HELOC, plus interest. If one were to pretend the HELOC were a 15 year 4.25% mortgage, the monthly P&I would be about $75. If you took the entire 15 years to pay it off, each $10k borrowed would incur a little over $3,300 in interest (with a continuous mix of current and future/inflated dollars).
Obviously this could become a trap if $10k per year were added to the HELOC indefinitely with no available income to pay it off. Or if interest rates started to go up a lot. But each year's $2,200 tax return (or equivalent reduction in payroll taxes) could be used to pay the minimum payment plus another $110/mo, shortening the payoff to 5 yrs. For the scenario I have in mind, the person would use the HELOC to pad out the pre-tax funds in years where income was low or expenses were high, and then pay it down in years with higher income or lower expenses.
So other than the interest rate risk, what else am I missing? I'm ignoring the possibility that financial hard times could lead to a loss of the house since the HELOC is technically a lien; let's imagine that this person has enough already saved in the EF and/or 401k to withdraw in an emergency in case the bank called the loan immediately.