[Congressional Record Volume 147, Number 74 (Friday, May 25, 2001)]
[Extensions of Remarks]
[Pages E978-E979]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                 FIRST-TIME HOMEBUYER AFFORDABILITY ACT

                                 ______
                                 

                          HON. JOHN J. LaFALCE

                              of new york

                    in the house of representatives

                          Friday, May 25, 2001

  Mr. LaFALCE. Mr. Speaker, I am introducing the ``First-time Homebuyer 
Affordability Act.'' This legislation is identical to H.R. 1333 from 
the 106th Congress.
  This bill is a pro-homeownership initiative, based on the principle 
of empowering families and individuals to use funds in their own 
retirement accounts to buy a home.
  The ``First-time Homebuyer Affordability Act'' unlocks the more than 
$2 trillion currently held nationwide in Individual Retirement Accounts 
(IRA's) for homeownership use. It does so by allowing individuals to 
borrow up to $10,000 from their own IRA (or from their parent's IRA) to 
use as a down payment on a first-time home purchase. Since funds are 
borrowed, rather than withdrawn, the homebuyer does not incur federal 
taxes or a premature withdrawal penalty.
  This bill is a targeted effort to narrow the arbitrary disparity 
between treatment of 401(k) retirement plans and IRA retirement plans. 
Under current law, individuals may borrow

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from their 401(k) retirement account without paying taxes for a broad 
range of purposes, including buying a home. Yet, individuals cannot 
borrow or otherwise use funds in their IRA for personal use, even to 
buy a home, without incurring federal taxes. This is a significant and 
inequitable impediment to homeownership.
  Four years ago, Congress took a modest step towards lowering 
financial barriers to the use of IRA funds for home purchase--through 
enactment of a waiver of the 10% premature withdrawal penalty for 
withdrawal of up to $10,000 from an IRA account for a first-time home 
purchase. However, such a withdrawal still subjects the homebuyer to 
federal taxes on the amount withdrawn. For a $10,000 withdrawal by a 
typical taxpayer in the 28% tax bracket, this creates a federal tax 
liability of $2,800--leaving only $7,200 for a down payment on a home 
purchase.
  Under the ``First-time Homebuyer Affordability Act,'' funds may be 
borrowed tax- and penalty-free from an IRA account for a period of up 
to 15 years. The loan must be repaid if the house is sold or if it 
ceases to be a principal residence. When the loan is repaid, the funds 
are restored in the IRA account, fully available for re-investment on a 
continuing tax-deferred basis.
  Alternatively, the bill permits use of IRA funds for a first-time 
home purchase as a home equity participation investment. Under this 
approach, IRA funds are used for down payment; when the house is sold, 
the investment, plus a share of the profit from home sale (typically 
50%) is repaid to the IRA account.
  The purpose of IRAs is to encourage long-term savings and investment, 
to provide a financial cushion in retirement. Yet, even though buying a 
home is one of the best investments an individual can make, it is not 
an eligible IRA investment. Allowing an individual to borrow from their 
IRA to buy a home effectively makes this an eligible investment.
  Allowing IRA borrowing for home purchase would also eliminate a 
disincentive against IRA contributions. Many young families and 
individuals are hesitant to tie up funds in an IRA account that they 
may need later to buy a home. And, IRA borrowing for home purchase does 
not deplete the IRA account, since the funds are replenished when the 
loan is paid back. Thus, the bill will encourage more long-term savings 
through IRA retirement accounts.
  Finally, this legislation is responsibly drafted, to prevent self-
dealing and generally track provisions of 401(k) loans. Non-payment or 
forgiveness of the loan is treated as a premature withdrawal. In such 
event, the unpaid amount would be subject to federal taxes and a 10% 
premature withdrawal penalty.
  Other protections include a prohibition against taking an interest 
deduction on the borrowed funds, and a limitation that loan rates 
cannot vary by more than two hundred basis points [2%] from comparable 
Treasury maturities.
  I urge Congress to enact this pro-homeownership, pro-savings 
initiative.

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