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How a Roth IRA Could Help You Become a First-time Homeowner

Investment Retirement Accounts (IRAs) are long-term investments that aim at helping you save for retirement. As these accounts intend to secure your future, you are not allowed to withdraw funds until you turn 59½. To ensure that you abide by the rule, you need to pay a penalty on the amount withdrawn early and applicable taxes.

However, there are a few exceptions to this rule. You can use the Roth IRA money under certain circumstances and conditions.

Roth-IRA-RulesWhat Are the Roth IRA Rules (Roth IRA Withdrawal Rules)?

  • If you withdraw from the tax-advantaged retirement account before turning 59.5 years of age, it can cost a 10% penalty and taxes.
  • However, you can avoid these penalties and taxes if you have owned the account for at least five years. You can use your Roth IRA investment for the down payment for a home, but the rule qualifies for only a first-time home purchase.
  • You can withdraw your contributions for anything, at any given time without facing a penalty. However, the issue is when you start making earnings.
  • According to Roth IRA withdrawal rules, you can take out up to $10,000 without paying tax and penalty provided you are using the money for a first-time home purchase.
  • However, if you are withdrawing more than $10,000 in earnings, you can get into trouble. So, consult an experienced and knowledgeable tax professional to understand penalties and other consequences before you move forward.
  • Moreover, you need to use your withdrawn money within 120 days and the amount must go only to fund the cost of the home, else you may be liable to pay taxes and penalties.

Can You Buy a Home Using Roth IRA?

  • You can purchase a home using Roth IRA if you already have saved enough for retirement in other accounts. Also, if your primary intention to have a Roth account is to save money for a home down payment, then experts recommend it as a good option.
  • Even if you are contributing to another retirement account, withdrawing money from Roth IRA to buy a home would be considered an opportunity cost. This is because your overall returns on the home might not beat market returns.
  • If a Roth account is your only option to fund your home, then it’s a red flag. In such circumstances, not buying a house is the best option rather than going out of your way.


Why Use a Roth IRA to Buy a Home?

  • You can take out funds from any tax-advantaged retirement account to make a down payment for a first-time home purchase. IRS considers you a first-time home buyer as long as you haven’t owned a house for the past two years.
  • However, withdrawing early from other accounts like an individual retirement account or traditional 401(k) increase your tax bill. You won’t have to face a 10% early withdrawal penalty but own tax on the money you take out because your original contribution is tax-free.
  • If you don’t need the money for retirement, then make the best of the IRA account to generate cash for the purchase.

How To Setup a Roth IRA to Purchase a Home?

  • Buying a home using Roth IRA is recommended because of the flexibility it provides.
  • Many people use the account to save the funds for the down payment for a first-time home buy.
  • They only have to meet the five-year rule and they are eligible to withdraw up to $10,000 without any tax or penalty.
  • This plan also works for young workers who save for their retirement through a 40(k) plan.
  • Although there are some market risks, the rewards and gains can balance that efficiently.
  • You can take the risk based on how long until you require the funds. If you won’t need money for the next 10 years, then feel free to invest aggressively and slowly get conservative over time.

IRA-to-Purchase-a-HomeWhat Are the Terms for Using Money from Roth IRA?

  • If you were saving Roth IRA funds for retirement and already planning to use the money for a home purchase, then refrain from doing so.
  • The goal of such accounts is to help people save as much as possible for their retirement. You can take a loan for a vehicle, home, holiday, business, and whatnot, but no one will give you a loan for retirement.
  • If you are contributing to 401(k) and have planned well for your retirement, then using a Roth account makes sense.

Deciding What is Best for You

Withdrawing money from IRA will drain out your savings and reduce years of compound interest. Also, due to the contribution limits, you won’t be able to rebuild the account. Therefore, use your IRA funds to buy a home only when you run out of all other options. Make sure that you consider the timings of your purchase. If you can wait for a few years, it can keep your retirement savings intact.


About the Author

Rick Pendykoski is the owner of Self Directed Retirement Plans LLC, a retirement planning firm based in Goodyear, AZ. He has over three decades of experience working with investments and retirement planning. Over the last 10 years, he has turned his focus to self-directed accounts and alternative investments.