ResalesOpen IRAs To First-Time Buyers, Says Congressman
WASHINGTON -- The ranking Democrat on the House Financial Services Committee has introduced legislation to allow first-time home buyers to borrow up to $10,000 tax-free from their Individual Retirement Accounts to use as a downpayment.
Currently, taxpayers may borrow from their 401(k) retirement accounts for any purposes, usually without incurring a federal tax burden. However, taxpayers may be subject to both a tax and a penalty under certain circumstances. For details, speak with your tax adviser and plan administrator.
Unlike the 401K program, the tax code prohibits borrowing from an IRA account, and imposes full income taxes on any funds withdrawn, even if the money is used to buy a first home.
"This policy is anti-home ownership and should be changed," said Rep. John LaFalce, D-NY, whose bill would permit rookie home buyers to borrow from their own IRAs or those of their parents without being penalized by Uncle Sam.
The measure, "The First-Time Home Buyer Affordability Act" (H.R. 2022), would give first-timers buyers access to some of the more than $2 trillion currently held in IRAs. And it has the support of the National Association of Realtors, National Association of Home Builders and the Mortgage Bankers Association.
"The purpose of IRAs is to encourage long-term savings and investment, to provide a financial cushion in retirement," the influential lawmaker said. "Yet even though buying a home is one of the best long-term investments an individual can make, it is not an eligible IRA investment."
Four years ago, Congress waived the 10 percent premature withdrawal penalty assessed account holders when their funds are used for a first-time home purchase. But account owners are still subject to full federal taxation.
For a family in the 28 percent tax bracket seeking to take $10,000 from an IRA, the tax liability would be $2,800, leaving only the remaining $7,200 for the downpayment.
Rep. LaFalce said his measure is "a targeted effort to narrow the disparate tax treatment between" IRAs and 401(k)s.
But in that "study after study" has shown that amassing a downpayment is the single largest roadblock standing in the way of families and individuals trying to purchase their initial homes, he added, it"s also intended to boost home ownership and increase long-term retirement savings.
Until passage of the 2001 tax relief act in May, IRA contributions of up to $2,000 per year were allowed -- a limit that first went into place in 1981. Under the new rules, the limit is raised to $3,000 in 2002, $4,000 in 2005, and $5,000 in 2008. For details, speak with your tax professional.
For more articles by Lew Sichelman, please press here.