Climbing the Mountain
Taking Steps Toward Home Ownership
by Alacias Enger
Julia and her husband have recently had a bit of a financial windfall. An unfortunate car accident from the past has finally settled and they’re expecting a check in the mail to the tune of $14,000. They’re both excited and nervous, considering this money to be a tremendous opportunity for them both to invest in their future, and they’re unsure about how to handle it. Historically, Julia has always been tremendously cautious when it comes to debt and the couple doesn’t really carry any. Through diligence and hard work, they’ve managed to save $5,000 in an emergency fund, which isn’t fully funded, as it only covers a little over a month worth of their expenses, but they are well on their way. Both Julia and her husband are employed, though careful to remain under the income restrictions set forth by New York State’s AIDS Drug Assistance Program (ADAP). They’re both aware that ADAP restricts, not only their income, but also their liquid assets. Until recently, the couple had never really considered this an issue. Once this insurance check is deposited into their savings account, the couple will have $19,000 in savings, and they’d like to keep going. They’ve spent their entire adult lives renting and would really like to position themselves to buy a home, but aren’t sure how to navigate saving for a fully funded emergency savings, a 20% down payment, and still remaining under the $25,000 liquid asset limit set forth by ADAP. The mountain feels insurmountable.
What’s important to remember is that any mountain can be climbed with the right equipment. Looking at the financial eligibility criteria for ADAP, a person’s household income is limited to 435% of the Federal Poverty Level, which is updated annually. Julia and her husband have successfully remained within those limits. Liquid assets are restricted to $25,000, with liquid assets being defined by ADAP as “cash, savings, stocks, bonds, etc.” Moreover, the organization continues to clarify that “Liquid assets do not include car, home, or federally recognized retirement accounts.” If Julia and her husband purchase a home, it will not be counted against her where her ADAP benefits are concerned, just as their personal vehicle is not counted against them. Where the untapped potential lies is within that third exception, federally recognized retirement accounts.
Federally recognized retirement accounts are useful tools for more than just retirement. Julia has access to a 401k at work and has been contributing just enough to get the company match. It is possible that she could take a loan against her 401k for the purpose of coming up with the down payment to purchase a home. This is a strategy that many first time home buyers utilize. Since this would be a loan, she would be required to pay it back to her own account with interest within a set period of time. Also, if she left employment with her current employer, she would be required to pay it all back rather quickly. These terms, coupled with the loss of compound interest resulting from the funds being temporarily removed from the retirement account make a 401k loan an option with some distinctive drawbacks.
Cue option number two:The Roth IRA. IRA stands for Individual Retirement Arrangement. Despite its name, the Roth IRA is an incredibly useful tool for a multitude of purposes. Unlike a Traditional, a Roth IRA doesn’t save you money on your taxes in the now. That’s because you contribute to it using dollars that have already been taxed. The funds grow tax-free and get pulled out in retirement having already been taxed, which is one of the myriad of reasons people love it. Another reason is that because you’ve already paid the taxes on your contributions, the IRS will allow you to take them out at any time without any penalty. The only thing that you cannot take out prior to retirement age without penalty is the growth. That being the case, this is an ideal tool for Julia and her husband to utilize to save more money. A lot of money in fact. The question becomes, just how much can they squeeze out of their budget? You see, in 2019, the contribution limit is set to $6,000 ($7,000 if age 50 and above). Since they can each open their own Roth IRA, they could save $12,000 per year in this account. Add that to their liquid savings, and their home purchase is just around the corner.
Alacias Enger is a performing artist, writer, and educator. She lives with her partner in New York City, and is the founder of blogs “Sense with Cents” and “Travel Cents.” Follow her on Twitter @sense_w_cents. If you have a personal finance question you would like answered in the column, please send an email: [email protected].