Could You? Yes! Should You? No.

I met with a younger client couple recently who have done a great job over the past 15 years of saving into their Roth IRAs and systematically building toward their goals.  They have an opportunity of a lifetime to acquire a dream piece of land and a home that would work well for their growing family.  The challenge is, they hadn’t planned for this large of a purchase to happen for another 3 – 5 years.  It was fun talking about this decision with them, as my husband and I had a similar opportunity 26 years ago to purchase the house that became home for us and for our two sons.  26 years ago, we could barely afford it.  26 years ago, the property required more work than we’d thought it would.  26 years ago, it was a stretch.  And to add to the excitement, the day before we were scheduled to close on the home, we found out I was pregnant.  What motivated us through any hesitation was that the location was perfect, the house had the most important features that were on our checklist, and together, we were wholly capable of whatever we needed to do to make our dream work.  We trimmed our budget.  We found ways to increase our income.  And similar to my clients, we took this step a few years earlier than we had planned. 

My clients have a downpayment account that is short of their goal, because of the accelerated time frame.  Had they had another 3 – 5 years to save and invest, their downpayment account would have been sufficient.  They asked a great question:  What about using funds from their Roth IRAs?  The IRS does in fact, allow a lifetime maximum distribution of up to $10,000 per person for a qualified first-time home purchase, without the 10% premature distribution penalty prior to age 59 ½.  Since my clients have had their Roth IRAs for over five years and meet the other requirements per IRS publication 590-B, they would in fact qualify for this exception.  Another option would be to withdraw their principal contributions, since that is also allowed without penalty by the IRS.  That would help toward their downpayment significantly.   

We had the Rule of 72 conversation about doubling periods:  take the rate of return you estimate to earn, divide that into the number 72 and that gives you the approximate doubling period of your money.  If for example they earn an 8% rate of return, their money would double every 9 years.  $20,000 becomes $40,000 in 9 years.  $40,000 becomes $80,000 in another nine and in another nine, they’d have $160,000.  That’s only 30 years, which is well within their time horizon that they intend to keep the Roth IRAs.  To sweeten the deal, since money is Roth, it may grow tax free and be distributed tax free.  But because of strict rules and important to this scenario, once the money comes out of the Roth IRA, it may not be put back in.  Only new contributions or conversions may be added.  A better strategy, we discussed, would be to find a way to finance the same $20,000 and pay that loan off as aggressively as possible.  Even if the interest rate is less than desirable, the loan is only temporary.    Conversely, if money is withdrawn from their Roth’s, it leaves a permanent hole of compounded lost opportunity. 

So, to answer their question about withdrawing from their Roth accounts:  Could you?  Yes.  Should you?  No.

LouAnn Schulfer of Schulfer & Associates, LLC Wealth Management can be reached at (715) 343-9600 or louann.schulfer@lpl.com TheWealthInformationLady.com  SchulferAndAssociates.com , or louann.biz

Securities and advisory services offered through LPL Financial, a Registered Investment Advisor.  Member FINRA/SIPC.

 Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.

A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply.

Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA.

The rule of 72 is a mathematical concept and does not guarantee investment results nor functions as a predictor of how an investment will perform.  It is an approximation of the impact of a targeted rate of return.  Investments are subject to fluctuating returns and there is no assurance that any investment will double in value