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.

Fourth Quarter 2016 Letter

2016 was a noisy year and if anything the noise problem is accelerating. Thomas L. Friedman was the first to postulate that “The World is Flat” in his euphonious book originally published in 2005 where he pointed out that because of the internet, anywhere in the world is next door and the flow of information is faster than we could have ever imagined. Just over a decade ago the noise only came from TV, radio, newspapers, and then our desktops.

On January 9th2017 the 10-year anniversary of the iPhone was celebrated.  When Friedman first published his book the iPhone didn’t even exist yet, but today for many Americans the never-ending deluge of information from the internet comes at us not just from our desks but from our pockets.  Now how many of us are tethered to the noise 24/7? Laptops, tablets and now seemingly ubiquitoussmartphones. All too many of us are sucked into texts, tweets, and now AR games (Pokémon Go).

Information can certainly be useful, but is more information always helpful? How does any of this information help us get from here to there? Sometimes all of this information overload can be dangerous. In September, Michael and Glenda were rearended in a fenderbender caused by a distracted driver behind them who was looking at her navigation system on her phone rather than the traffic. It's great to have navigation at your fingertips, except when you can not see what is just ahead of you.

If you think that you can navigate through all of the noise then you might not need our help. However, we believe that our world view can and does provide value. For as long as you have been reading my reports and blogs you know that Creative Wealth Management is dedicated to the long view. We know that to help you get a handle on your long term goals you need to take into consideration all the relevant information. Even today’s information. Yes we need to know what is happening today but guess what; it’s always Today. That’s how we work.

Sometimes in business, there’s a negative connotation to being able to “see right through” a person.  The implication is that there is a façade hiding the true intentions of someone and that façade is not doing its job.  We want you to see right through us because there is no façade, because we strive to be transparent.  We don’t claim to know the things we cannot know.  What we do claim is in our ability to plan.  You may be asking yourself how it would be possible to plan for unknowns.  If it were easy, we would have more direct competitors. 

Sure you can get planning and investment advice from many other companies, but we pride ourselves on our unique approach to being transparent and reactionary.  While someone else might give you a plan today for the next 5,10,15 or 30+ years, we know that every morning when you wake up, it’s today and your plan still needs to be good for the next 5-30+ years.  We have decades of experience in working with people both financially and emotionally to help them deal with life as it comes.  We’re ready for what comes next, and fully admit we can’t know what exactly that is.  What we can say is our experience has prepared us to help you deal and plan for whatever that is, our job is never done, because in less than 24 hours tomorrow will be today.  We know the world is loud and we don’t want you to get a headache hearing all the noise, it’s our job to listen for you and to you.

 

Securities offered through Royal Alliance Associates, Inc., Member FINRA/SIPC

Advisory services offered through Creative Wealth Management, LLC a registered investment advisor.

Not affiliated with Royal Alliance Associates, Inc.

 

 

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