Retirement Funds for Home Purchase



For the person who has good credit and income but not enough money for the down payment on a home, their qualified retirement program could offer them some help. The rules are different depending on whether it is a 401(k), a Roth IRA or a traditional IRA.

Up to half of the balance of a 401(k) or $50,000, whichever is less, can be borrowed by the owner at any age for any reason without tax or penalty assuming the employer permits it. There can be specific rules for loans from 401ks that would determine the repayment; interest is usually charged but goes back into the owner’s account. You can consult with your HR department to find out the specifics.

A risk in borrowing against a 401(k) comes if your employment ends before the loan has been repaid. The loan may have to be repaid with as soon as 60 days to keep the loan from being considered a withdrawal and subject to tax and penalty. Even if you continue with the same employer, failure to repay the loan could be considered a withdrawal also.

Roth IRA owners can withdraw their contributions tax-free and penalty-free at any age for any reason because the contributions were made with post-tax income. After age 59 ½, earnings may be withdrawn as long as the Roth IRA have been in existence for at least five years.

Traditional IRAs have a provision for first-time buyers which include anyone who hasn’t owned a home in the previous two years. A person and their spouse, if married, can each withdrawn up to $10,000 from their traditional IRA for a first-time home purchase without incurring the 10% early-withdrawal penalty. However, they will have to recognize the withdrawal as income in that tax year. For more information, go to IRS.gov.

Another interesting fact about this provision is that the taxpayer making the withdrawal can help a relative includes children, grandchildren, parents and grandparents.

If you want more information to clearly understand the issues involved relative to your specific situation, talk to your tax professional or consult www.IRS.gov.

Choose a Lower Tax Rate

During campaign season, it is not unusual to hear a candidate criticized because they make a lot of money but pay little in income tax. While it might not seem fair, taxpayers are allowed to arrange their affairs so that they minimize the amount of tax paid.

Salary, wages and commissions, along with interest and dividends are taxed at ordinary income rates which can range from 10% to 39.6%. However, capital gains rates, for property held more than 12 months, are much lower ranging from 0% to 20%. Taxpayers in the 25-35% brackets pay LTCG rates of 15%.

The profit on rental property enjoys the lower long-term capital gains rates as compared to the profit on “flipped” property which is taxed at ordinary income rates.

Investments in rental homes generate income, provide depreciation for tax shelter, have equity build-up due to the amortizing loan, leveraged growth due to the borrowed funds and appreciation. The profits could be considerably higher than alternative investments and the profits taxed at lower rates.

The advantage is available to people who understand the tax laws and choose to arrange their activities so they pay a minimal amount of tax. The advantage is available to all taxpayers, not just the rich. In fact, implementing these types of strategies could lead to an increase in wealth.

Increase Your Marketability

The seller has three tools available to affect the marketability of their home: price, condition and terms. Price is the easiest to adjust for the competing properties, amount of inventory or market conditions. However, lowering the price is not necessarily the best decision when trying to maximize the proceeds of sale.

If a home is in poor or outdated condition, updating can be done to make it show favorably with other homes that are currently on the market. Sometimes, sellers rationalize not doing the work by saying they believe the buyers would rather make their own choices. The truth is that most buyers are using all their resources to get into the home and will have to live in its present condition until they can save enough to make the changes they want.

Another reason to go ahead and invest the money and effort into improving the condition is that it is difficult for buyers to imagine the home any other way than its current condition. When comparing one home to another, buyers will sometimes refer to a home as the “stinky house” or the “old kitchen” which may put it at a disadvantage.

While price and condition are the main things that control the marketability, terms can be equally effective. Terms relate to financial considerations made by the seller to induce a buyer to make a decision to purchase their home.

Seller-paid points or closing costs, interest rate buy downs and owner-financing are examples of terms that may increase the marketability of a home because of the additional benefits they offer to buyers.

An example could be that a seller will carry a 10% second lien so that the buyer can get an 80% loan and avoid the expense of mortgage insurance. The seller gets most of their equity plus a fair interest rate on the loan that doesn’t have to be tied up for 30 years like the first mortgage.

Increasing the marketability of your home is a great conversation to have with your real estate professional especially to help you get the highest price in the shortest time with the fewest problems. Just be aware that not all agents may be as creative as some.

The Obvious Alternative Investment

Rental homes can be a natural alternative investment choice for homeowners because they are already familiar with houses. Maintenance on a rental is not that much different than on your personal home. The same plumbers, painters and other workmen can be used to make repairs.

Single family homes offer an investor high loan-to-value mortgages at fixed interest rates for long terms on appreciating assets with defined tax advantages and more control than other investments.

1. High loan-to-value mortgages – most investments require that you pay cash but rental properties can be purchased with 20% down payment.
2. Fixed interest rates – most commercial loans are based on a floating rate such as prime interest plus one or two percent compared to real estate loans as fixed rates for the term.
3. Long terms – commercial loans are generally short-term such as six months or a year with the possibility of being renewed for another six months or a year unlike real estate where a 30-year mortgage is commonplace.
4. Appreciating assets – real estate has a long-term history of going up in value.
5. Defined tax advantages – many investments are taxed as ordinary income but rental real estate enjoys a non-cash deduction called cost recovery, the profits from sale are taxed at lower long-term capital gains rates or may be eligible for a tax-deferred exchange.
6. Control – rental homes don’t require partners and afford the investor more options than investing in mutual funds and other traditional investments.

The demand for good rentals is strong and the rents continue to go up in most markets.  There are people who choose not to buy or cannot buy a home who would prefer to live in a single family home rather than an apartment.

Your Tenants Will Send Your Kids to College

Parents, with children getting closer and closer to entering college, may also be feeling stress because they haven’t saved enough for tuition and other expenses. It’s estimated that the average cost for the 2015-16 school year is $32,405 for private colleges, $9,410 for state residents of public colleges and $23,893 for out-of-state residents.

If you started saving the year your child was born, you’d have to save $4,608 per year for 18 years at 5% to accumulate $129,620. If you waited until they were 10 years old, you’d have to save $13,574 per year to have the right amount. Saving enough can be difficult if you have a lot of time but if you only have a short time to meet your goals, it can seem impossible.

Student debt is one way to handle the tuition but many parents are reluctant to saddle their children with the obligation. Currently, there is more than $1.2 trillion in outstanding student loan debt to 40 million borrowers with an average balance of $29,000. Some economists suggest that this debt is delaying would-be buyers from making their first home purchases.

There is another way to pay for the education by making an investment in a rental property. Rents are continuing to rise, homes in owner-occupied neighborhoods are appreciating and the leverage due to borrowed funds can be a huge help in building the equity to pay the tuition.

Rent the home and maintain its condition over the years. As the loan amortizes and the value increases, the equity will grow. When your student is ready to start college, you'll actually have several options.

You can sell the property; pay the tax on the gain at the reduced capital gains rate and fund the education. Another option would be to refinance and take the proceeds to pay for the tuition. This would allow you to continue to own the asset but would free your equity. Under current tax laws, it is a non-taxable event.

In effect, your tenants are paying to send your kids to college.