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 36,000

For those of you who have been around a long time,you might have remembered the book DOW 36,000 by James K. Glassman and Kevin A. Hassettpublished in 1999. At the end of a very strongbull run in the 1990’s these two authors predicted that the market was underpricedand the great bull marketwould drive stocks significantlyhigher.

We now know that that was an outrageous prediction, yet here we stand two bear markets and one enormousrecession later, and onTuesday,November 22, 2016,the Dow closed above 19,000 for the first time.

When we look back to election night when it first seemed that Donald Trump might win; the pre-marketnumbers were showing a scary decline of over 700 points[i]possibly bringing the Dowdown into the mid 17,000’s. Herewe are, two weeks later, with the Dow breaking new all-time highs.

On Tuesday, November 22nd, I was interviewed by a reporter for Newsday[ii]who called the recent market run up the “Trump Rally.” We discussed that the US markets, especially financial stocks, had rallied significantly since the election to reach this point, and what investors should look for in 2017.

There are always two sides to a coin.   Although the reporter was correct about the stock market rally he completely missed the bond markets’ major decline. No one is perfect! In the first week after the election the global bond markets lost more than a trillion dollars.[iii]The same factors behind the stock market rise may have directly led to the bond decline.

Many people believe that the Trump administration will follow through with a major tax cut, and cut regulations on banks, repatriate corporate overseas profits and increase defense spending. These policies could act to stimulate the markets (they already have) and at the same time possibly stimulate inflation, which would scare bond markets (they already are). Although we should be thankful, and take advantage of the stock market rise, we need to also look at the effect that the bond markets are having on our portfolios. After we spoke, the writer made some adjustments and included the effects of rising interest rates in addition to rising stock markets in his article.

The yield on the 10 year Treasury Bond rose from 1.83% on November 7thto 2.42% on November 23rd.[iv]This had an immediate impact on mortgage rates; raising the average rate for 30 year mortgages from 3.5%, 3 weeks ago, to slightly over 4% this week.[v]This may take some people out of the housing market and reduce the potential pool of buyers and possibly lower sales prices of homes. The catch 22 here is that the fall in price will not change the cost of carrying a new home rising mortgage costs will offset that. However; the net profit that sellers will get could go down. This is especially important if you are a retiree who is trying to lower expenses and free up cash by selling a house.

 With interest the rates rising along with the stock market what should investors do? We think that TIPS (Treasury Inflation Protected Securities), and other inflation hedges should start being added to your fixed income portfolios.You should be more thoughtful than ever of the dangers of trying to reach for yield. If your fixed income investment is paying a high rate of return you should remember higher returns always come with higher risk. In this current marketplace most of your bonds should have short maturities. With short maturity bonds you will have the opportunity to reinvest at higher yields as each group of bonds mature. As far as your equity investments are concerned, enjoy the current returns but remember the markets are bound to have a correction but no one can accurately predict when that will occur. When the markets are rising, as they are now, greed starts to cloud our judgment and often we will not want to sell a winning position. Nevertheless, a wise man once said that you will not go broke by taking some profit off the table. 

1377 Motor Pkwy, Suite 212 | Islandia, NY 11749 | P: 631-232-9170 | F: 631-232-9175


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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