The Advantages of a Roth IRA Home Purchase

by Maggie McCormick, studioD

Since a Roth IRA allows you to withdraw your contributions at any time, it may be just what you need if you're struggling to purchase a home. The big disadvantage, of course, is that this money is no longer growing for your retirement. Still, you may find that the advantages outweigh this disadvantage.

The Down Payment Hurdle

If you're already paying rent, there's a good chance that you'd be able to afford a mortgage, as long as you choose a home that produces a mortgage in the same price range as your current rent payment. Gathering money for the down payment, though, can be a big challenge. Using the money in your Roth IRA removes this initial hurdle, allowing you to buy a home and begin building equity.

Higher Down Payment

Even if you are able to save money for a down payment without dipping into your retirement funds, it may not be as much as you want. If you withdraw from your Roth IRA to increase the amount of your down payment, you can significantly decrease your monthly payments. Paying 20 percent or more as a down payment eliminates the need for private mortgage insurance, which is another way to reduce your total cost.

No Penalties and Taxes

The Roth IRA isn't your only option for getting your down payment. You're also able to withdraw from a 401k plan or a traditional IRA. Though the traditional IRA allows you to take up to $10,000 penalty-free, you'll have to pay taxes on that money. Withdrawing more than $10,000 from a traditional IRA or from a 401k will incur a 10 percent early-withdrawal penalty in addition to paying the taxes. Withdrawing your contributed amounts from the Roth IRA incurs no taxes and no penalty fees, though you may be subject to these on withdrawals from earnings.

Some Retirement Savings Left

If you've followed the rules to avoid penalties, you'll be left with some money in your IRA account. This money can continue to grow tax-free until your retirement. You'll also be able to continue making contributions to the account.

About the Author

Maggie McCormick is a freelance writer. She lived in Japan for three years teaching preschool to young children and currently lives in Honolulu with her family. She received a B.A. in women's studies from Wellesley College.

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