First-Time Homebuyers: Should You Use Your Roth IRA for the Purchase?
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You can take advantage of the Roth IRA first home purchase distribution as many times as you want. Just make sure that the lifetime total of your withdrawals does not exceed $10,000. The withdrawn funds can only be used to pay for "qualified acquisition costs." NerdWallet strives to keep its information accurate and up to date. This information may be different than what you see when you visit a financial institution, service provider or specific product’s site.
"Some first-time homebuyers may want to have a substantial down payment to avoid private mortgage insurance," says Marguerita M. Cheng, a CFP and CEO of Blue Ocean Global Wealth. The tax-free rollover might be "the most efficient way to access funds for the down payment," qualify for better financing and thus clinch the home purchase. "You will have to include the payments in your monthly budget," says Peter J. Creedon, a certified financial planner and CEO of Crystal Brook Advisors. "Also, the interest you are charged for the 401 loan may not be tax deductible and will probably be higher than current mortgage rates." You won't get to use the first-time homebuyer provision again to buy a home, even if you use a different IRA.
Can I Use My IRA to Qualify for a Mortgage?
It’s important to keep in mind, that while you are allowed to withdraw from the plan, that doesn’t mean you should. Every situation is unique so speak with a financial advisor if it’s worth it. Someone with a million dollars across retirement accounts is better off than one with $20,000. Traditional IRAs also come with the penalty-free exclusion for qualified home purchases. We've mentioned so many hassles and drawbacks that you might be wondering at this point if there is any point in putting property in an IRA.
In this article, you’ll learn how to use your Roth IRA money toward a first-time home purchase, as well as the pros and cons of doing so. Once you’ve got enough saved up, it’s time to buy your home. If your first contribution was at least five years ago, you’re good to withdraw an unlimited amount of contributions and up to $10,000 of earnings tax and penalty-free. This content is provided for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. References to any securities or digital assets are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services.
What Mortgage Options Are Available?
Since Roth IRA contributions are paid with after-tax dollars, one can take out funds for qualifying purchases like a house, without paying taxes on them. Although an investor might intend to use Roth IRA funds for retirement, life can get in the way. So, say you have $25,000 in a Roth IRA. Of that, you’ve contributed $15,000 of your own money, and the rest has come from the growth of your investments. You can typically access that initial $15,000 at any time, no strings attached. If you want to take out more than that, it may be subject to penalties or taxes if you don’t qualify for an exception to these rules.
The credit score of the buyer will have an impact on the interest rate on their mortgage. Using one’s own money may mean borrowing less for a down payment, and avoiding a PMI payment. A Roth IRA can be considered a type of savings account for this purpose if all other qualifications noted above are met. Roth IRAs are funded with after-tax dollars—meaning an investor has already paid income tax on the money they contribute to the account. Investors are therefore free to withdraw any and all of their original contributions to fund a home purchase, without penalty or taxes.
Things to Consider Before Withdrawing from Your Roth IRA
You can take plenty of steps to cut down on the costs of home buying. If you haven’t owned a home in the last two years, you may qualify for one of many first-time homebuyer programs. Some of these cater to people meeting specific income limits, who work in certain professions or who wish to live in designated areas. So if you’ve amassed what you need to purchase a home with your contributions alone, you can tap into it without having to meet the rules stated above.
While Roth IRAs are designed primarily for retirement savings, you can also withdraw up to $10,000 of your account’s earnings for a first-time home purchase. You can also use that money to build or rebuild a first home. Note that the IRS will consider you a first-time homebuyer if you and your spouse haven’t owned a home that you use as your main residence in the past two years.
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In a Roth IRA, your basis is the amount of contributions you’ve made over the years. To figure out your Roth IRA basis, look at how much you’ve contributed to your account each year. Check your account statements for records of your contributions. If you’re not sure, reach out to your Roth IRA custodian for help. You have 120 days from the time of the distribution to use the money on IRS-approved home-related costs, such as the down payment or closing costs. The IRS will consider you a first-time homebuyer if you and your spouse haven’t owned a home that you use as your primary residence in the past two years.
The IRS lets you collect from this bucket at any time for any reason without penalty or taxation. In most cases, you repay the loan through automatic payroll deductions. This sounds easy enough, but it’s important to understand what happens if you miss payments. If it’s been longer than 90 days since you’ve made a payment, the remaining balance will be considered a distribution and will be taxed as income.
When it comes to individual retirement accounts , financial assets—stocks, bonds, mutual funds, or exchange-traded funds —are the usual investment suspects. Still, it’s possible to hold real estate in your IRA under certain conditions. For example, you can buy single-family or multiplex homes; apartment buildings; commercial properties such as retail stores, hotels, office complexes, raw land and lots; and even boat slips. To avoid paying income taxes on Roth IRA distributions of earnings, you need to meet the five-year rule, even if you’re using the money to purchase your first home. However, because traditional IRA withdrawals are taxable, no five-year rule applies.
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