Financial Q&A: What account is best when saving for a home?

Q:
What is the best tool for saving money to buy a first home: a savings account or an IRA?

K.P., Boston

A: Choosing an IRA or a savings account to save for a home purchase will depend on your tax rate and your savings time horizon. Basically, Mark Stinson, a CPA in Columbia, Md., says that if your savings time horizon is long and your tax rate is high, you should consider an after-tax savings account. If your time horizon is short or your tax rate is low, opt for an IRA.

If you have a long time horizon, you can invest in equities (stocks or mutual funds) and get preferential, or lower, tax treatment for dividends and capital gains. On the other hand, if your time horizon is short, say, less than five years – or if your tax rate is less than 25 percent, consider an IRA. Invest conservatively, however. You need to minimize the risk that the value of your investments would be lower than when you started, and you will not have to pay high taxes on the income (interest) you earn.

The IRS allows penalty free withdrawals from a traditional or Roth IRA before age 59-1/2 for a first-time home purchase. However, if you have not met your retirement savings goals, you should use the long-term tax-deferred growth (traditional IRA) or tax-free growth (Roth IRA) IRAs that provide for retirement savings. Keep in mind that both traditional and Roth IRAs have complex rules, and penalties for incorrectly taking an early distribution can be severe.

Q:
I'm an independent futures trader – a day trader. Is it possible for me to set up an IRA or a Keough account using my trading account? I would be managing my own money this way.

G.M., via e-mail

A: There are self-directed Individual Retirement Accounts. But Peter Chandler, associate director of investor education at the Financial Industry Regulatory Authority (formerly the National Association of Securities Dealers) says that you'll have to find a custodian that will carry out your instructions. This could be a bank trust office.

Be sure to verify that the trustee you select allows self-directed futures trading. This is highly speculative and involves risk that could result in loss of some or all of your principal investment. But then, as someone already in that game, you understand that.

Mr. Chandler recommends placing only a portion of your retirement savings in a self-directed account. That would give you diversity and safety,

There are some special tax rules governing such investments. For more information, he would direct you to the IRS website "IRA Frequently Asked Questions," at www.irs.gov/retirement/article/0,,id=111413,00.html.