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.

Bagels, Bernanke and Business




 I served seven years as the chair of the Princeton economics department
where I had responsibility for major policy decisions, such as whether to serve
bagels or doughnuts at the department coffee hour. 
 

Ben Bernanke, Federal Reserve Chairman

We don’t have that problem – we’re serving bagels AND doughnuts at our October 15th Bagels, Bernanke and Business Brunch, a new quarterly program we’re rolling out to encourage a more in-depth dialogue with clients, colleagues and friends.

The goal is simple: to provide perspective and insight into today’s economy.

Markets are confusing.  Once again we are faced with a government that seems determined to make Wall Street quake.  The saber rattling has become non-stop, with great drama accompanying every decision, from whether or not to extend the massive bond buying program to using the Affordable Healthcare Act as a hostage in budget negotiations.

We may never see “normal” times again.

However, understanding how these elements impact on markets, economic policy and the bottom line – your investment accounts – will help you do something that many Americans don’t:  sleep well at night.

 We hope you’ll join us on Tuesday, October 15, at 8:30 AM at our office, 1377 Motor Parkway, Islandia, NY 11749 for a productive and enlightening discussion.

Let us know if you are coming and we’ll make sure to have your favorite bagel – or doughnut!  Call us at 631-232-9170 or send an email to This email address is being protected from spambots. You need JavaScript enabled to view it.


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