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.

[i] IRS
[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.

Today's Truth

This morning the WSJ1  reported that the Board of Trustees reported that Social Security will run short of reserves in 2033, about three years earlier than reported in their last report. 

Although this is disturbing it is important to note that the short term stability of the Trust fund is solid for now2.  There are two main factors that caused the trustees to make this adjustment. First, the effects of reducing the employee’s portion of the payroll tax by 2% each year for 2011 and 2012.  This temporary cut acted to remove $215 Billion from the trusts accounts over the last two years. The second cause is the fact that the trustees are assuming a lower average real earnings over the 75 year projection that the trustees use to report their findings3.

Although this is causing a problem, we should all be aware that “real” rates of return are under pressure in our current slow economic recovery4.

Although unsettling, this news should not be a surprise to anyone. Not a day goes by without us being bombarded by the politicians about the problems with our budget and major entitlement programs. There is no question that if nothing is done the system will begin to break down if not for us than for the generations behind us.

Should you worry? If you are over 70 and already receiving benefits, you are probably ok.   Just remember what your congressional representative’s position on protecting Social Security is before you get to the November election. If you are younger, you need to be prepared to have Social Security be a smaller part of your retirement and you need to do whatever is necessary to squeeze every dollar out of the system that you are entitled to.

In that light,  we are running special Social Security Workshops at our office on May 9th, May 22nd, June 5th and June 21st to help you deal with these issues. You can register at

Michael D. Kresh, CFP®

1 WSJ April 24 2012
4 Real rate of return is a reference to the gross rate of return earned by an investment minus the rate of inflation


*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.


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