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

We had just started to shake off the issues in Europe when Greece, France and Germany’s elections made it clear that voters believe that change in government is a better solution to solving financial woes than directly addressing them.  We all know that this approach will never work.   

While we are still wrapping our head around that issue, last night (May 10th), JP Morgan CEO Jamie Dimon held a special conference call to discuss to disclose the fact that the bank’s hedging strategy lost $2 billion (that’s right, $2,000,000,000) in the last six weeks.

Let’s applaud Mr. Dimon for his immediate, direct and public confession. Clearly, he thinks that what happened is a major mistake that needs to be addressed quickly and in the public eye. This differs significantly from our recent experience with other big banks and financial institutions. Just a few years ago, companies including Bear Sterns, Lehman Brothers and Citigroup dealt with similar problems with an approach that may as well have been called “Obfuscate, Obfuscate, Deny and Lie”.

Mr. Dimon brings us a good news- bad news scenario. On one hand, Mr. Dimon is a CEO who is at least trying to establish a culture of responsibility. On the other hand, once again, a money center bank’s    money managers and analysts have fallen short. These professionals appear to have failed in their basic task of protecting the firm’s capital, ie. shareholder’s wealth.

 One can rightfully ask:   Did JP Morgan’s investment officers learn from the 2008 market meltdown, or are they just creating new versions of old mistakes? Did money managers who invested in JP Morgan stock look under the hood as much as they should?

Money managers who believe that there was nothing to learn from the last correction, who are not looking more critically at the companies that they follow, and who do not recognize that companies  are still trying to hide risk from their investors are not earning their keep and do not have a place in our client portfolios.  No manager has a crystal ball; no matter how good they are and how hard they work, they will make mistakes.  However it is one of my jobs to make sure that we are getting value for what we pay for. And it is quite clear that paying for bad advice is worse than getting no advice at all.

Michael D. Kresh,  CFP CLU

*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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