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.

Fiscal Cliff, Road Runner and Remembering Henny Penny

The latest buzzword is straight out of a Road Runner cartoon or fairy tale.  It’s not on Cartoon Network®, but on major news and business broadcasts.  Are we really facing a fiscal cliff, a perfect storm, that is about to take us over the edge to financial disaster on a global scale? 

It’s not surprising that the phrase is so dramatic, because the news is daunting:

• A presidential election in November – markets hate uncertainty.
• The expiration of Bush-era tax cuts on December 31, unless Congress acts in a timely manner
• A second deadline for the deficit ceiling, again, requiring Congress to actually do something
• Tumult in the European Union, facing the result of years of lax or negligent fiscal policies

“The issues are absolutely serious, but the world is not coming to an end,” says Michael Kresh, CFP®, Creative Wealth Management, LLC. “The timing could be better.  Congress will not act until after Election Day. They will come to some agreement but not until they absolutely have to.  And Europe is a serious concern, even with the bailout for Spain.  But the Henny Penny school of money management is not the solution, even if it feels a lot like the sky is falling.”

Kresh’s recommendations:

• Know what you own.  Don't rely on the names of investments, or the investment category names literally.Take a closer look to find out what exactly is inside those investments.  For instance, if they are companies, what companies are they, and what is the proportion of various companies and sectors?

•  There is no such thing as an investment without risk, but some are more risky than others.  Know your tolerance for risk, and speak with your advisor to make sure you are in the right place for your comfort level.

• Remember that the best time to buy is when markets are low – that’s when stocks are on sale.

• Keep your long-term goals in mind. 

• Steer clear of headline-worthy IPOs – if the average investor has access to an IPO, chances are it’s not that big a deal.  Sort of like Groucho Marx not wanting to belong to any club that would let him be a member!

• Speak with a trusted financial advisor who can help you navigate the paths to reach your ultimate financial goals, whatever they may be.


*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.

Fixed income investments are subject to various risks including changes in interest rates, credit quality, and other factors. Securities sold or redeemed prior to maturity may be subject to a substantial gain or loss. In general, the bond market is volatile as prices rise when interest rates fall and vice versa. This effect is usually pronounced for longer-term securities.

Investors should understand that investing in strategies that are non-correlated to the stock and bond markets are not without risk. There can be no assurance that alternative investments will be profitable and will even outperform asset classes correlated to the stock and bond markets.



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