With mortgage interest rates at historic lows and the uneven performance of the stock market over the past few years, some of you may be pondering using your Roth IRA fund to buy a house. Let’s take a look to see if you are even allowed to do this, and if so, if it is a good idea.
Can I Use My Roth to Buy a Home?
The bottom line is yes, you can use funds in a Roth IRA to purchase a home. However, there are two different ways of going about it. Which method applies to you depends on your homebuying situation.
Special First-Time Homebuyer Clause
Roth IRA rules state that a first time homebuyer can withdraw funds from a Roth IRA under the following conditions:
- The account has been open for five years.
- You withdraw $10,000 or less to purchase a home.
- The funds are used directly toward home acquisition (down payment, closing costs, etc.).
If the above criteria are met you can withdraw every last cent of your Roth IRA, up to $10,000, from the account. The $10,000 limit is a lifetime limit, by the way. If the rules are met, the withdrawal will count as a qualified distribution and you will avoid paying income tax and early withdrawal fees.
Who Is a First-Time Homebuyer?
The good news: You don’t have to have never bought a home to qualify for this benefit. You just have to have not owned a home during the two-year period before you’re buying this new home.
By the way: If you’re married, you can’t use this provision unless your spouse also qualifies as a first-time homebuyer. If he or she does (and owns a Roth IRA and has not already used the $10,000 lifetime limit), you would qualify to borrow $10,000 from each of your Roth IRAs, for a total of $20,000.
Withdraw Contributions at Any Time
What if you aren’t a first time homebuyer? What if you want to withdraw more than $10,000? You can still withdraw.
One of the major perks of using a Roth IRA is that you’ve already paid income tax on your contributions. Your account grows until retirement, and you never pay another cent of income tax on your nest egg. Likewise, you don’t pay any income taxes by withdrawing your contributions.
You can withdraw all of your contributions at any time without penalty or tax. (Your earnings have to stay in the Roth IRA.) So if you have socked away a lot of money over the past several years into a Roth you could pull those funds out to aid in your home purchase.
Is Using a Roth for a Home Purchase Wise?
Now that you know you can withdraw funds from your Roth IRA for a home purchase, the next question is should you?
Do You Have Other Funding Options?
Unless you specifically opened up the Roth IRA to set money aside for your home purchase, you might want to consider other funding options. Wiping out your initial investments today will set back your retirement savings by many years. You end up losing out on the growth in the account. There is less time for compound interest to work in your favor, and your nest egg ends up being smaller in retirement.
If you are having to tap an IRA to fund your home purchase because you have no other options, you need to reconsider. A home purchase is a major decision (as is gutting your retirement). You need to be setting aside money monthly to save up for a down payment.
Investment Performance Expectations
The only reason you might consider gutting your Roth IRA to buy a home today would be if you were extremely pessimistic on the future of investing in the stock market. You would have to be really pessimistic if you feel you’re getting a better return by avoiding a 5% mortgage (minus potential tax deductions) than investing, but it’s definitely in the realm of possibility. Many people also look to wipe out (or avoid) a mortgage to improve their monthly cash flow.