How about using IRA to finance a house?

Nation's Housing

Congress weighs bills to allow home loans similar to 401(k)

April 11, 1999|By Kenneth R. Harney

SHOULD millions of Americans with individual retirement accounts (IRAs) be discriminated against by the federal government when it comes to financing a home? Should their $2 trillion in savings be effectively kept off-limits for home buying for themselves or a family member?

Sounds like a no-brainer, yet it's a fact: If you are an IRA account holder, you cannot borrow money from your retirement plan to buy a home yourself -- or to help a child or grandchild buy a home -- without paying federal income taxes.

Yet most Americans who participate in employer- sponsored 401(k) retirement plans can readily pull out cash tax-free anytime to help a relative buy a home.

Why the discriminatory treatment? Experts on Capitol Hill say it's partly the result of separate evolutionary tracks for different types of federally regulated pension accounts.

In the case of IRAs, according to one aide, Congress was concerned in past decades that account holders might be tempted to "self-deal" their tax-deferred retirement savings, using funds for speculative real estate investments and other high-risk ventures.

To deter such abuses, Congress imposed not only a 10 percent penalty on most "premature" withdrawals (before the age of 59 1/2) from IRA accounts, but also required account holders to pay income tax at their regular rate on the amounts withdrawn.

Other types of retirement accounts -- including private employer 401(k) plans and the federal government's own retirement-savings plans for its employees -- traditionally have allowed penalty-free borrowing by participants up to specified dollar limits.

In 1997, Congress moved part of the way to rectifying the disparate treatment of IRA accounts by eliminating the 10 percent penalty for IRA holders who withdraw up to $10,000 for a home purchase. But IRA holders who make home-related early withdrawals still have to pay income tax on whatever they pull out.

That means that a taxpayer in the 28 percent federal bracket who wants to help a son or daughter buy a first home could pull out $10,000 from an IRA, but would owe the federal government $2,800 for the privilege. The son or daughter, in turn, would net $7,200, not the full $10,000 that he or she would get if Mom or Dad were tapping a 401(k) account.

But legislative help may be on the way. Key members of the House and Senate are sponsoring bills that would end the unequal treatment of IRAs for housing purposes. Rep. John J. LaFalce, of New York, the ranking Democrat on the House Banking Committee, introduced the "First-time Homebuyer Affordability Act" (H.R. 1333) before the Easter recess, with bipartisan support.

An identical bill is expected to be introduced this month in the Senate by Democratic Sen. John F. Kerry of Massachusetts.

The bill would allow anyone with an IRA to withdraw up to $10,000 tax-free and penalty-free provided it was lent to a child, grandchild, spouse or grandparent for the purpose of purchasing a "first-time" home.

"First-time" is generously defined by the bill to include anyone who hasn't owned a principal residence anytime in the 24 months prior to obtaining the IRA assistance.

Other important requirements for pulling out IRA housing cash tax-free under the bill:

The money would have to take the form of an interest-bearing loan. In other words, you couldn't simply pull out $10,000 and gift it to the home buyers.

The loan would have to give the IRA account holder a legal "ownership interest" in the property to safeguard the retirement dollars.

The term of the loan could be up to 15 years. Payments by the homebuyer could be on a monthly, amortized basis (principal plus interest), or on an interest-only basis.

The remaining principal would be due and payable whenever the house was sold, or the loan term was complete.

The interest rate on the note would have to be no more than 2 percentage points above -- or below -- Treasury rates for securities with maturities comparable to the IRA loan.

If you arranged your withdrawal to meet all these tests, you could pull out $10,000 from any IRA penalty and tax free.

The outlook for the bill: Good, especially if it can be attached to a larger piece of legislation heading for floor action this year.

After all, said one Capitol Hill aide, "Who's going to oppose ending the discriminatory treatment of people with IRAs?"

Kenneth R. Harney is a syndicated columnist. Send letters care of the Washington Post Writers Group, 1150 15th St. N.W., Washington, D.C. 20071.

Pub Date: 4/11/99

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