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.

Shredding Success

On Saturday, June 3rd we had our first shredding party. It was a rip-roaring success judging by the quantity of old documents that arrived and the gratitude of our clients. Altogether, almost a half-ton of paper was sent to its doom. Just think of how many empty cabinets, boxes, and piles of old stuff we helped clean up.
We still have the ability to scan and place copies of your important documents in your vault if you are using eMoney. Our special deal on eMoney will continue for the month of June. So if you use eMoney or want to add eMoney, we will have your documents scanned and filed in your vault, and then shredded or returned to you at no cost.
If you would like to learn more about eMoney, please click on this link below:

On another note, this is the beginning of hurricane season, and NOAA (National Oceanic and Atmospheric Administration) just recently announced that they expect this year's hurricane season to be more active than normal up and down the east coast.[i] As always it is a good idea to be proactive for any potential storm or weather-related problem. Following is a link to NOAA's hurricane safety site where storm preparedness information can be found:

One of the problems that many people face when making a claim due to weather or fire related damage to their homes is poor documentation of valuables such as art, jewelry, and other items. Most insurance companies are recommending that you keep a digital record of such items. Since digital cameras are ubiquitous, it's very easy to create an inventory of all of your important belongings. However, these photos are typically stored only on home computers. If your home computer is also damaged your inventory may be hard to retrieve, making the eMoney vault a very secure option.
Summer is almost here so before you go on your vacation or take out your lounge chair now is a good time to get your stuff in order. However you opt to spend your summer we wish everyone a peaceful and relaxing one.
Michael D. Kresh CFP® RF™
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