[Congressional Record (Bound Edition), Volume 145 (1999), Part 4]
[Extensions of Remarks]
[Page 6097]
[From the U.S. Government Publishing Office, www.gpo.gov]


[[Page 6097]]


                 FIRST-TIME HOMEBUYER AFFORDABILITY ACT

                                 ______
                                 

                          HON. JOHN J. LaFALCE

                              of new york

                    in the house of representatives

                        Thursday, March 25, 1999

  Mr. LaFALCE. Mr. Speaker, today I am introducing the First-time 
Homebuyer Affordability Act. I am joined in this effort by 20 original 
cosponsors. I am also pleased to announce that Senator Kerry (D-MA) 
will be introducing this legislation in the Senate.
  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 $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 
downpayment 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rather than withdrawn, the homebuyer does not incur Federal taxes or a 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 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.
  Two years ago, Congress took a modest step toward lowering financial 
barriers to the use of IRA funds for home purchase--through enactment 
of a waiver of the 10 percent 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Federal taxes on the amount withdrawn.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 percent tax bracket, this creates a Federal 
tax liability of $2,800--leaving only $7,200 for a downpayment 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, either on a fully amortized or interest only basis. 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 downpayment; when the house is sold, 
the investment, plus a share of the profit from home sale (typically 50 
percent) 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.
  Finally, this legislation is responsibly drafted, to prevent self-
dealing and generally track provisions of 401(k) loans. Nonpayment 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-
percent 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 200 basis points (2 percent) from comparable 
Treasury maturities.
  As Congress considers proposals to create new individualized 
retirement accounts, it is important to structure such accounts in a 
way that provides access for home purchase. But, it is equally 
important to remove the significant tax barriers to home purchase for 
the $2 trillion in existing IRA retirement assets. The ``First-time 
Homebuyer Affordability Act'' accomplishes that important goal.

                          ____________________