Questions about cashing in a Portable Pension Account

We are looking to remodel our kitchen with a budget of $15,000. We were planning on getting either a HELOC or a home equity loan to pay for it. But then we remembered that when we moved last summer and my wife left her employer of 10 years, she converted her company pension plan to a Portable Pension Account (PPA). We got a statement the other day that says her current lump sum payment would be $13,807 - just about enough to pay for our kitchen. So we got to thinking: would it be smarter to cash this in rather than get a loan?

Some background:
She no longer works for that company, so they are not adding anymore compensation credits to the account.
She does get interest credits quarterly, which according to the statement "will be the lesser of (a) and (b), but not less than (c), where:
(a) is the greater of (i) 1 percent (1/4 of 4 percent) or (ii) one-fourth of the One-Year Treasury Constant Maturities rate, plus 0.25 percent;
(b) is the rate which, when compounded quarterly, produces an annual rate equal to the 30-year Treasury rate (or, if larger, such other rate as may be specified by the Treasury for purposes of carrying out the calculation required by Section 417(e) of the Code); and
(c) is .765% (one-fourth of 3.06%).
In no event will the quarterly interest credit rate, when compounded quarterly, produce an annual rate greater than the average 30-year Treasury rate."

I have no idea what any of that means.

The statement shows she got $135 interest for the June-August 2008 quarter and $136 interest for the Sept - November 2008 quarter, and that the current quarterly interest credit is 1.00%.

My main questions are:
1) Are we stupid to even consider taking the lump sum instead of a loan for our kitchen remodel?
2) What kind of growth potential does this PPA have with its current balance? We are 33 years old now.
3) What kind of tax consequences would there be if we took the lump sum now?

Any and all advice is appreciated. Let me know if any more information is needed. Thanks in advance.

Mark

You're wife's PPA is a retirement account and as such is qualified money (pretax). If you cash it out, income tax will be due for the entire amount, PLUS if you are under age 59.5, then there will be a 10% penalty on the entire amount as well.

So, your $13800 will likely be tax at about 25% for income tax, taking it down to $10350, PLUS if you are under the 59.5 age, there will also be a 10% tax assessed ($1380), taking your net withdrawal down to $8970. In short, this is a very inefficient source of funds and should not be cashed out.

Currently, the funds are invested in a low-paying, low-risk fixed interest account based on US Treasuries, which are paying all time lows. You may consider rolling the PPA into a personal IRA and investing in this depressed market based on your risk tolerance and time horizon (length of time until you can/will withdraw the funds). This would be a non-taxable event.

If you absolutely must move forward with the remodeling, then a Home Equity Loan (Fixed rate/fixed duration) may be the way to go. Interest rates are at all time lows as long as you have the income and equity to qualify. Although a HELOC may offer better CURRENT interest rates, we are in an economic scenario (huge and unprecedented government spending) that may produce some very ugly inflation in the next few years and the corresponding high interest rates that go with it.