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.

Dow 17,000 and What is Next

The most important thing about the Dow crossing the 17,000 mark is that it proves that over the short term, the economists who make predictions are more likely to be wrong than right. Add the strong July employment numbers to the Dow 17, and you’ve got good news.

Some pundits are concerned that Yellin is about to start Yelling (sorry, I’ve been waiting for this for too long) and raising interest rates. Each time we get good news, the talking heads come out and say the Fed is going to raise interest rates and that will be the end of this bull market. 

 I believe that the Fed chair has made it very clear that it’s not what she has planned. Since November of 2013 the Fed has rolled back its assets purchases from $85 Billion a month to $35 billion, reducing its stimulus by nearly 60%1yet the economy continues to move forward, although slowly. These Fed moves have not crushed the growing economy, because they are being done in a controlled and well-thought out fashion.

As for the nay-sayers, who want you to think something magical will happen at Dow 17, and that a crash is imminent, I say nay to them.  The pundits and prognosticators have been wrong, wrong, wrong, for some time now.  Bear in mind that many of them rely on dramatic predictions solely in an attempt to gain attention. You don’t gather web traffic by making positive statements.

To paraphrase Mark Twain, reports of the demise of the American economy have been greatly exaggerated. As I stated above, the Fed has not stopped our growth, Obamacare, regardless of what you think about it, has not destroyed the economy.  Job growth is continuing in a positive way. Today the current fear is poor anticipated earnings growth. It seems to me that equities are still the best way to make money today, tomorrow, and for the foreseeable future.

I believe that the second half of the year will have better than anticipated economic growth.  Things are improving. The more naysayers out there, the better I feel. Let them all predict the end of the world, and while they are lamenting the death of the bull market, we will just keep taking their money.

 Michael D. Kresh CFP

1 Forbes 06/18/2014

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.

This material contains forward looking statements and projections. It is our goal to help investors by identifying changing market conditions. However, investors should be aware that no investment advisor can accurately predict all of the changes that may occur in the market




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