Those of you who watched the “On the Money” segment on News 12 last Thursday heard me say that it was “silly” for individual investors to get involved in the FaceBook IPO. When Anchor Stone Grissom asked for an explanation, I said that this is a process to watch not participate, and the better approach would be to get a soda and some popcorn, watch TV and think of the FaceBook IPO like going to the movies and seeing the new Avengers movie: will they save the earth, and in the process how much of NYC will be destroyed? This was not a place for individual investors.
Just a few days later, we can see all of the turmoil created by the FaceBook IPO. First the NASDAQ couldn’t open the stock on time. Then many Broker/Dealers were unable to give retail customers proper confirms. Finally, after trading for a short time at 42 (after an IPO price of 38), the stock is hovering this morning near 30, a 30% drop from its peak and more than a 20% decline from its opening price. On top of this, the SEC and FINRA and Congress are starting probes into Morgan Stanley looking into allegations that analysts at this top underwriter were telling its best clients that there might be cracks in FaceBook’ armor at the same time they were raising the price offered to the public. Only a week after JP Morgan caused an uproar over their now nearly $3 billion dollar hedging loss. Again major financial institutions making headlines for the wrong reasons.
So what’s our takeaway?
Investing is a tool to help you reach your long term goals, not a get rich quick scheme. When carried out properly, investing is a way to increase your wealth to achieve comfort over time. If you can’t figure this out on your own, then you need a guide who understands this sometimes treacherous path and who can help you stay on course, rather than taking dangerous detours that add to your risk without any real rewards.
*The views expressed are not necessarily the opinion of Royal Alliance Associates, Inc., and should not be construed directly or indirectly, as an offer to buy or sell any securities mentioned herein. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Individual circumstances vary. Investing is subject to risks including loss of principal invested. No strategy including asset allocation or diversification can assure a profit against loss.
The Roth Advantage Part 2: First Time Homebuyer
March 16, 2018
Dan Kresh FPQP™
There are ways for first time homebuyers to access some funds from retirement accounts without "penalty". Though you may be able to avoid an early withdrawal penalty, you will be lowering the amount in your retirement account. You would likely be purchasing your first home many years before you plan to retire, depleting your account when it has the most time to grow. This is a complicated decision. It is important to understand the differences between how you could access funds early from Traditional or Roth IRAs.
A first-time homebuyer can access up to $10,000 from either a Roth or Traditional IRA to contribute towards a down payment[i]. Any funds taken out from a Traditional IRA, for any reason, including a first-time home purchase would be taxed as ordinary income. The tax deferred nature of the Traditional IRA is its biggest advantage, so using funds from a Traditional IRA to help fund a home purchase will forfeit some of that benefit while shrinking your nest egg.
With a Roth IRA, you can take out contributions at any time for any reason without a tax consequence since it's already after-tax dollars[ii]. The Roth IRA owner can also access up to $10,000 of profit for a first-time home purchase, and if you have had the Roth for more than 5 years that would be tax free.[iii] You should NEVER consider a retirement fund an emergency fund, however; the fact remains that there are less barriers and penalties to accessing funds from a Roth IRA early than from a Traditional IRA.
Tapping into your retirement account to buy a home should not be your first choice, but it's nice to know what options could be on the table. You have the best chance of growing your nest egg if you contribute the maximum into your IRA for as long as possible. Taking funds out of your retirement account before retirement age, with or without penalty and or tax, means you will have a smaller principal to hopefully compound over time. Your retirement money will serve you best in retirement and should be invested in a well-diversified portfolio for the long haul. Any investment involves the risk of loss of principal but the more diverse your investments and the longer your time horizon the better your chance is to mitigate that risk.
If your income is at or approaching limits for contributing to a Roth IRA part 3 of this series will discuss a potential way for you to contribute to a Roth IRA using Roth conversions. It's never too early to start thinking about retirement. The earlier you start the more time you have for growth. You work hard for your money, we work hard so your money can work for you.
[ii]Roth IRA Withdrawl
[iii]IRA To Buy A House
A Roth IRA distribution is qualified if you've had the account for at least five years and/or the distribution is made after you've reached age 59½, because of your total and permanent disability, in the event of your death or for first-time homebuyer expenses. Distributions made prior to age 59 1/2 may be subject to a federal income tax penalty. If converting a traditional IRA to a Roth IRA, you will owe ordinary income taxes on any previously deducted traditional IRA contributions and on all earnings.
You should always consult a tax professional and though this piece contains some tax information it should not be considered tax advice.