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.

Do we have to accept brinkmanship as the new normal?

The New Year has only just begun. Congress has pulled on the bungee cord, and we bounced back from the precipice. 2013 tax issues have been addressed,  but spending cuts have only been postponed for 60 days.
The markets breathe a sigh of relief, but there is a lot of work yet to be done.  Congress needs to address entitlements:  Social Security, Medicaid, and Medicare.  Defense spending and other parts of the federal budget will not be easily decided. 

If you think that 60 days is enough time, do not forget that this fiscal guillotine has been up in the air since July 2011. 

While I’m not surprised that nothing was done before the election, getting a lame duck Congress to pass important legislation is better than we should have expected.  But the work is far from completed.

As Long Islanders who felt the full wrath of the storm, we are deeply disappointed that as of this writing the House did not allow the Sandy Relief Act get to the floor for a vote.

All of this is a reminder that trying to time the market on Congressional action is a fool’s game.  Many people were recommending selling out of all stocks and waiting  until Congress acted.  If you did that, you would have missed out on a 4% upward market movement on Monday, December 31st   and Wednesday, January 2nd.

We move from brinkmanship to brinkmanship until Congress gets it right.  Our elected leaders need to be reminded that  like us, they should pay more attention to the overall economy (which has been showing signs of improvement) than to the practice of rhetoric, which never trumps action.
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