Can IRAs save the housing market?

From the NY Post:


NO doubt about it, the housing industry is in trouble. And as housing goes, so goes the national economy.

I’ll give you a simple solution that will eliminate the possibility of a complete meltdown in housing.

And I say this with some measure of pride as well as innate stinginess – it won’t cost us taxpayers a penny.

So, what’s this simple solution I’m advocating? Washington should change tax law so that people can use their retirement accounts to buy real estate.

By one estimate there is $6.5 trillion tied up in Individual Retirement Accounts, 401(k)s and other tax-advantaged retirement accounts. And, as anyone with one of these accounts knows, you can’t get at the money until you reach retirement age, unless you are willing to suffer a severe penalty for premature withdrawal.

The way the law is now written, I’m told, an IRA can only own real estate if it is set up as a trust or a custodial account that can be treated as a trust.

And the trustee must be a bank or a person that the Internal Revenue Service will accept as a trustee. Plus, the real estate can be prohibitively taxed.

But in hard times the government needs to make it easy for some of that $6.5 trillion to move from stocks and bonds into houses.

How should this be handled? Perhaps people should be permitted to withdraw up to 10 percent of their IRA funds, if the money is used as the down payment on a house maybe only for first-time buyers.

The premature withdrawal penalty would be waived or postponed until the house is sold and a capital gain achieved. The amount of penalty-free withdrawal could be adjusted up or down depending on how much you want to fuel the market.

And the money can be targeted, for example, with withdrawal penalties for IRA money more lenient in New Jersey, where housing needs a boost, than in New York, where it doesn’t.

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18 Responses to Can IRAs save the housing market?

  1. James Bednar says:

    If not IRAs, how about students? I’ve got to ask the question, is it prudent for students to be purchasing real estate at all? Should the state help them?

    From the Danbury News Times:

    State could help students buy a first home

    Monica Perry, like many students her age, has considered moving out of state because of the high housing costs here.
    “I was born and raised in Danbury, and I would love to stay here,” said Perry, 24, a nursing student at Western Connecticut State University who works at Danbury Hospital. “But there’s no way I can afford anything in this area. I’ve looked at some houses in New York state because Connecticut is just too expensive.”

    Perry said many of her friends have moved away or are still living with their parents. Some have fled to New Jersey, while others have moved to New York and Pennsylvania.

    “Even living at home it’s tough to save enough money for a house because things are getting so expensive,” she said. “Especially while trying to pay for graduate school.”

    Perry and about a dozen other students attended a presentation at the university Monday about a proposed state program that could help them purchase their first home.

    The proposed legislation would allow graduates of Connecticut public or private colleges to use the money they pay in state income taxes to help buy a house; they could save up to $3,000 annually for as long as 10 years.

  2. R Patrick says:

    Where was this when I bought…

  3. PeaceNow says:

    It is already possible to use a limited amount of IRA money for real estate. I believe the limit is $10K, and the closing on the property has to be within one year of the withdrawal. (I did this in 2003, however, so the rules may have changed.)

  4. Brooklyner says:

    This guy wants people to drain their retirement accounts into one concentrated overpriced asset (a house)? Thats the worst idea ever! That money is there to fund your retirement not buy overpriced, illiquid, risky assets. If the government allowed that, then the country’s IRA balances would all but evaporate and in 20 years taxpayers would have to bail out millions of angry 65 year old voters that saved nothing for retirement.

  5. lisoosh says:

    What a great way to erode peoples limited savings rate even further!

    This is about as moronic as it gets.

  6. chicagofinance says:

    pathetic drivel

  7. NJNewbie says:

    Why is it such a bad idea? Doesn’t real estate gain over a long period? Without being sure of the numbers, I would think it’s nearly the same as 401K gains with the typical stock/bond mixes. It would be nice to purchase investment property with the money – especially in the metro NJ area where there are plenty of would-be renters.

    An alternative would be to have tax-free savings/mm accounts that are earmarked for residential housing purchases. We first time home buyers need some help!

  8. James Bednar says:

    Consider leverage and diversification.


  9. RentinginNJ says:

    Bad idea. Most people already don’t save enough for retirement. Raiding what little retirement savings this country has would be a disaster. Another example of screwing ourselves tomorrow because we don’t want to face the consequences of our excesses today.

    I could, however, maybe support some sort of tax-deferred savings account for first time buyers that doesn’t include raiding retirement savings. As someone trying to save for a down payment, it seems like we get screwed every which way. I have nothing to write off, so my taxes are sky high, then the govt. takes a big chuck any interest I manage to earn.

    Current tax policy encourages buyers to buy ASAP to get the mortgage interest deduction, whether they can afford it or not. By allowing for a tax-deferred down payment savings account, we could encourage real old fashion home ownership; the kind with a down payment and some skin in the game. Because it would take a while to build up these savings, it would provide a better long term sustainable demand, rather than the short term bump the market would see from everyone draining their 401(k)’s.

  10. NJNewbie says:

    90% of your 401K will remain intact under the given scenario – maintaining diversification.
    Besides 10% of “Average Joe” first time home buyer’s 401K doesn’t amount to much, but may be enough to help them get into the RE game. Not to mention they’ll have a long career of building their retirement.

    However, I would still opt for a tax-def savings account if the option were available.

  11. James Bednar says:

    By allowing for a tax-deferred down payment savings account, we could encourage real old fashion home ownership; the kind with a down payment and some skin in the game.

    Seems like without signficant restriction, the abuse potential could be very high.


  12. Lindsey says:

    What Brooklyner said.

    This is beyond dumb.
    Newbie, why would you want to get into the game 10 runs behind with two outs in the last inning?

    People love to talk say “free market” this and
    “free market” that, right up until the free market is about to hand them their head, which is where the RE market is right now. If market forces are allowed to play out prices will go down thereby increasing affordability. People are going to get hurt, and that sucks, but that’s what happens in a free market.

  13. NJNewbie says:

    Lindsey, I apologize, I should have qualified my statement…I’m not talking in terms of speculating. Yes in the near term housing, and probably the equity market as well, will bite you in the behind. However, looking at a RE purchase as investment property is not such a bad idea…it will appreciate over the long term. Housing should not be considered a short term investment. We should start thinking like our parents (I’m 32 so my folks are 60s) if we want RE to return to affordable prices. Hey…most of the Boomers I know are sitting pretty with RE they purchased 30+ yrs ago. My father just sold a house for just under $500K that he purchased in 1975 for

  14. NJNewbie says:

    cont: (sorry, not sure what happened there?)
    …for less then $30K. Not a bad investment!

  15. Tim M. says:

    I don’t understand why some folks are so eager to keep the price of real estate propped up higher than it should be. I NJ many homes have increased over 100% in value since 2002/2003 – this is not normal and should not be encouraged. Allowing folks to drain their retirement savings to continue to support unatural gains in the housing market is idiotic – and just shifts the risk from people’s home prices to their retirment income – this strategy just prolongs the inevitable meltdown. At some point we all will have to accept that markets come down as well as they go up. Many people seem to have lost their basic understanding of economics. One example: I know of an apartment (OK – I recently sond this apartment) in NJ that rents for about $1,000/mo. – that same apartment recently sold for $250,000. Assuming a 20% down payment, the mortgage on this apartment is $1300/mo. + taxes ($200/mo.) + maintenance fees ($250 mo.) = $1750/mo. – so the new owner pays $1750/mo. for an apartment that could generate $1,000/mo. in income. This makes no economic sense! the market of supply and demand is in balance when the rental value of a home equals the cost of ownership – in most normal markets, the cost of ownership is usually slightly lower that the rental cost. This was the case when when we bought the place in 2001 – for $90,000.

  16. RentinginNJ says:

    …for less then $30K. Not a bad investment!

    Not bad, only because he just sold at the top of the biggest bubble in history. Even factoring in this giant bubble, he only slightly outpaced the Dow.

    In normal times, RE typically just outpaces inflation. We are unlikely to see appreciation like we saw in the past few years again in our lifetimes.

  17. Rob says:

    Having people raid their retirement accounts to pump liquidity into the real estate market sounds like a heck of an idea to me.

    People are so stupid about their debt levels, maybe we should bring back debtor’s prison and indentured servitude for a while. That might give some of these people at least a moment’s pause before asking for another helping of borrowed money.

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