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.

Is there a safe middle ground for investing?

There’s been a lot of talk lately about the safe “Middle Ground” of  investing, which raises the question – what is “safe investing”?  I’m not going to say it is an oxymoron like jumbo shrimp because it is not that simple.  However, it bears saying that investing in any kind of financial product by its very nature involves some kind of risk.  Even putting assets into a savings account involves risk – if the interest rate is lower than inflation, the cash loses value.  That is  simple enough.  But financial investment decisions are usually not that clear – and that’s part of the problem.

So on one hand we are currently hearing advertisements using the words “safe,” “low risk,” or even alternative investments .”  Here’s the thing – advertisements costs money, but consumers want to hear those warm fuzzy words – high yield and safe.  These are emotional words and open to wide interpretation, so the advertiser cannot be held to a specific claim.  It’s a lot like the “Buy Gold Now Before the price goes up” – the call to action to invest in yesterday’s news.

Your portfolio might actually need to include some alternative investments .” Many of these investments have long been part of the total portfolios of major endowments and large pension plans.  However,  the recent availability of many newer types of investments for consumers are marketing driven, not needs driven.  If a product manufacturer creates a new product  that is only now available to consumers, then I’d suggest consumers  do a higher level of research to determine if it is right for them.

Here is Today’s Truth:  If you hear lots of commercials for an investment, chances are good that there are hidden costs and risks.

A few more Truths to consider:

• Is the investment liquid,  i.e., can you sell it and get your money in three business days?
• If it is not liquid,  how can it be “safe”?
• Is it a hard asset like a coin, or even a diamond?
• If it needs to be appraised, stay away (unless you are a collector).
• Do you understand it?
• It’s not “cool” because it is complicated. It’s likely complicated in order to confuse you. 

The core of this advice is simple: if you can’t trade it, or if you can’t understand it, then you should not own it.  If you need help to understand what and how to invest , that’s okay – but choose an advisor who is willing to state that they have a “fiduciary responsibility” to take care of your interests first.   


*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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