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.

The Roth Advantage Part 4: Prior Year Contributions

Dan Kresh FPQP™

Since Roth IRA contributions are made with after tax dollars, there is no need to report them on your tax return.[i]  This is another benefit of Roth over Traditional IRAs.  Contributions to a Traditional IRA, even non-deductible ones, must be reported on your tax return[ii].

The deadline for IRA contributions is not the end of the calendar year. For contributions to a Roth or Traditional IRA, the deadline is the same as the tax filing deadline.  So, for 2017 contributions the deadline is April 17, 2018[iii].  Though this deadline is for both Roth and Traditional IRAs, the fact that Traditional IRA contributions must be reported makes last minute contributions tricky if you filed your taxes early.  Since you don’t need to report Roth contributions you can still make a contribution even if you have already filed your tax return early, without any further paperwork. 

The takeaway is there’s still time to make a prior year contribution up until the tax deadline.  You have about 15½ months to make a contribution for a calendar year, from January 1st through the tax filing deadline.  This also means that if you didn’t make a prior year contribution, you can make two contributions between January 1st and the tax deadline (prior year and current year).

There’s no time like the present to invest in your future. You work hard for your money, we work hard so your money can work for you.    



You should always consult a tax professional and though this piece contains some tax information it should not be considered tax advice.


The Roth Advantage Part 3: Roth Conversions

Please first select your blogger from module configuration before proceed.

Archived Blog

Financial Updates

Personal Financial News

Company Info

1377 Motor Parkway
Suite 212
Islandia, NY 11749
Phone: 631-232-9170
Fax: 631-232-9175

Follow Us