Can You Use a Roth IRA to Purchase a Home?

July 6, 2021 By , ,

Roth individual retirement accounts (Roth IRA) are a great asset to help save for retirement, but did you know that they can also get you into a new home? Your Roth IRA may be able to give you the boost you need to get into your first home. Learn more to see if you’re eligible.

Typical Roth IRA Withdrawal Rules

Withdrawing funds from a Roth IRA account is different from withdrawing funds from a bank account or even most other types of retirement accounts. You can’t just pull money from it whenever you need it. You can only start freely using these funds after age 59 1/2. Before then, you can withdraw your contributions without penalty (those are made post-tax for this account type), but accessing your earnings is harder. Early withdrawal of earnings means you’ll pay taxes on that amount, plus a 10% penalty on top.

Under normal circumstances, it isn’t a good idea to make these early withdrawals, even of your initial contributions. The whole point of a retirement account is to keep your investment safe for retirement and to ensure that your money grows over time. Making early withdrawals on your earnings defeats the purpose of having the account in the first place, right?

Still, owning a home is a major investment that can improve your financial future. From equity to the potential to generate rental income, there are multiple ways that homeownership can pay off over time. That payoff can become an important part of your retirement savings strategy. That’s why there’s an exception to the typical withdrawal rules for Roth IRAs—you may lose funds from your account in the short term, but you (potentially) make a better investment for the long term.

The Five-Year Rule

This exception, called the first-time homebuyer exclusion, is designed to help homebuyers who need funds. To qualify, you’ll need to meet the following criteria:

  • You have held your Roth IRA for more than 5 years
  • You are a first-time homebuyer or you haven’t owned a home for at least two years

If you meet both of these qualifications, you can withdraw up to $10,000 for costs related to purchasing a home, such as a down payment or closing costs, with no additional taxes or penalties. If you only meet the first-time homebuyer qualification, you can still withdraw up to $10,000. You’ll just need to pay taxes on that amount; the typical 10% early withdrawal penalty is waived.

Should I Take Money Out of My Roth IRA to Buy a Home?

Even if you qualify for the first-time homebuyer exclusion and feel confident about your decision to buy a home, take some time to think before you dip into your retirement funds. Consider how close to your retirement savings goals you are. Have you only begun to save recently, or do you have multiple retirement accounts that you contribute to? Using Roth IRA funds to help purchase your first home makes the most sense when you:

  • Can plan ahead and open the IRA specifically to help save for a home purchase
  • Also contribute to a 401(k) or will be due a pension at retirement
  • Can see definite financial benefit from homeownership but don’t have other sources of funds to cover down payment or closing costs
  • Either don’t qualify for or don’t want to go with a 0-down-payment loan program

With all that said, the fact that you can use your Roth IRA to purchase a home doesn’t necessarily mean that you should. Talk to your Mortgage Advisor about your options and consider the potential drawbacks of missing out on the investment potential that’s currently in your Roth IRA.


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